Heightened Stress in Retail Banking and MSMEs To Push Out Inflexion Point: Ind-Ra
Moneylife Digital Team 08 September 2021
While maintaining a stable outlook on the overall banking sector for the rest of FY21-22, India Ratings and Research (Ind-Ra) says, heightened stress in the retail segment and micro, small and medium enterprises (MSME) would push inflexion point. 
In a research report, the ratings agency says, “Asset quality impact in the retail segment has been higher for private banks with a median rise of over 100% (on smaller base) in gross non-performing assets (NPAs) over the first quarter (Q1) of FY20-21 to Q1FY21-22. For public sector banks (PSBs), the rise is about 45%. Banks have also undertaken restructuring in retail assets, including home loans, which could have postponed an immediate increase in slippages. Overall stressed assets including gross NPAs, plus those restructured in the segment are expected to increase to 5.8% by end-FY21-22 from 2.9%.”
The MSME sector has been under pressure with demonetisation, introduction of goods and services tax (GST) and Real Estate Regulatory Authority (RERA), slowing down large corporates, and now COVID-19. However, the Indian government has supported the segment by offering liquidity under the emergency credit line guarantee scheme (ECLGS) and restructuring. 
Ind-Ra says it expects that beginning Q3FY21-22, a portion of such advances would start exiting moratoriums, a part of which could slip and cause GNPAs (gross NPAs) to increase to 13.1% by end-FY21-22 from 9.9% in FY20-21. Stressed assets similarly would increase to 15.6% from 11.7%, it added.
Banks in India continued to strengthen their financials by raising capital and adding to provision buffers which have already seen a sharp increase in the past three to four years.
Ind-Ra says it has kept its FY21-22 credit growth estimates unchanged at 8.9% for FY21-22, supported by a pick-up in economic activity post-Q1FY21-22, higher spending by the Union government, especially on infrastructure and a revival in demand for retail loans. 
The agency estimates GNPA at 8.6% and stressed assets at 10.3% for FY21-22. Ind-Ra also expects provisioning cost to increase to 1.9% from its earlier estimate of 1.5% for FY21-22.
Ind-Ra has a stable outlook on large private banks, indicating their continued market share gains in assets and liabilities while competing intensely with public sector banks (PSBs). “Most large private banks have strengthened their capital buffers and proactively managed their portfolio. As growth revives, large private banks are likely to benefit from credit migration due to their superior product and service proposition,” it added. 
The ratings agency also has a stable outlook on most old private banks. With a loyal liability franchise, Ind-Ra says, it believes old private banks would continue to operate in their niches where they are a sole banker or sizeable lender for a large proportion of the borrower’s needs. 
However, it says, “as old private banks face competition on multiple fronts – small finance banks (SFBs), non-bank finance companies (NBFCs) and new-age players, they would need to invest in services and technology orientation even further to be in the play for the existing business as well as growth.”
Ind-Ra’s stable outlook on PSBs considers continued government support through large capital infusions, including Rs2.8 trillion over FY17-18 to FY20-21 and further Rs200 billion provisioned for FY21-22. This will lead to a significant boost in capital buffers over the minimum regulatory requirements, significant improvement in provision coverage to 68% in FY20-21 from 49% in FY17-18, overall systemic support resulting in lower-than-expected COVID-19 stress and smooth amalgamation of PSBs, the ratings agency added.
Ind-Ra has a negative outlook on five banks, which have about 6.5% of system deposits, driven primarily by weak capital buffers and continued pressure on the franchise.
The ratings agency has a stable outlook on the SFB segment on the back of high capital buffers, high yield loan business and deposit rate and technology-driven traction on the liability side. Given the growth ambitions of banks and their investors, many of them would aspire to become universal banks to service customers across the yield spectrum, it added.
According to Ind-Ra’s analysis, incremental stress addition from the corporate segment is at low levels. Based on a bottom-up analysis of stressed corporates using two filters like revenues above Rs1 billion and interest coverage below 1.5 times, Ind-Ra estimated that the segment’s GNPA stood at 10.0% and stressed assets was 10.8% at end-FY20-21. 
For FY21-22, Ind-Ra estimates GNPA to increase to 10.2% and stressed assets to increase to 11.3%. This implies a year-on-year increase of about 20 basis points (bps) on GNPA and about 55bps overall on the stressed asset front, it added.
The ratings agency feels that upward movement in the yield curve could weigh down profitability for the banking sector. Ind-Ra says it analysed the impact of a reversal in the long-term yield curve on the investment portfolio of banks and expects an adverse effect on the profitability with a 100bps upward shift in the yield curve. 
“This could impact the pre-provisioning operating profit of PSBs by 8.0% and that of private banks by 3.2%; while for the overall banking system, the impact could be 5.8%,” Ind-Ra added.
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