Banking sector update
Last updated: 09 Sep, 2020 | 03:13 pm
NPA wave to hit banks
- As of March 2020, the gross non-performing assets (Bad loans) of the banking sector was approximately 8.5% of the total advances. Covid-19 pandemic and the ensuing lockdown will significantly push up bad loans for the banking sector
- “According to the latest report released by KV Kamath Committee, 19 sectors which were not under stress before the pandemic but have been hit by it, account for Rs 15.5 lakh crore of debt”. Retail and wholesale trade are the worst affected with an outstanding debt of Rs 5.4 lakh crore.
- The pandemic has also affected 11 sectors which were already under stress. These sectors have a debt of Rs 22.2 lakh crore. Non-banking financial companies (NBFCs) have the highest, Rs 7.98 lakh crore, among these sectors.
How could public sector banks be affected?
- A stress test conducted by the Reserve Bank of India suggests that the Covid-19 crisis could push Indian banks’ gross bad loans to their highest in nearly two decades (record of 12.7% in March 2000).
- In this dire scenario, public sector banks remain the most vulnerable. The pandemic will result in bad loan ratios surging to 15.1% for public sector banks and a bigger deterioration in capital ratios. Gross NPA’s refers to the ratio of total gross bad loans to total advances (loans) of the bank. Net NPA = Gross NPA less provisions.
- Historically, public sector banks have had a higher share of overall Gross and Net NPAs. “The Gross NPA ratio for Public Sector Banks stood at 11.3% as compared to a GNPA ratio of 4.2% for their private counterparts as at the end of FY20, according to RBI.”
- Similarly, the Net NPA ratio was also higher for Public Sector Banks at 4.1% as compared to 1.4% for private sector banks (as of March 31st)
- Interestingly, while the bad loans are higher for Public Sector Banks, their Provision Coverage Ratio is lower than private sector banks, indicating that they are ill-prepared to handle the upcoming wave of bad loans.
How much of the loan book is under a moratorium for banks?
- Public sector banks will have to increase their capital buffer, hurting their profitability in the upcoming years.
- According to estimates by ICRA, ₹45,000-82,500 crore capital might be required to overcome the rising asset quality pressures. The overall credit growth is projected at a dismal 3-4% in FY21.
- Besides state-run banks, private lenders, too, need and are expected to raise approximately Rs 25,000-48,300 crore capital during FY21-FY22 to maintain higher capital ratios and mitigate rising asset quality stress.
- “Credit provisions will continue to exceed the operating profits for the public sector banks (PSBs) during FY2021, translating in a sixth consecutive year of loss. (on an aggregate basis)”
- Icra expects the profitability of private sector banks to moderate with return on equity falling to 3.5-5.1% in FY21 against 10-12% projected earlier
- The table below shows important metrics for large PSBs in FY20, and the current Gross NPA and Net NPA ratios
Invest only in high credit quality banks that have stable cash flows, sufficient liquidity to see the crisis through and ethical management that is capable of handling a barrage of bad loans in the coming future. The investment might be through equity, bonds, fixed deposit etc, irrespective of the instrument the criteria should not change.
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