Asset quality pressures might return to haunt banks as lockdown stretch cashflows: Icra

The slow growth in credit amidst the Covid-19 pandemic and an already slowing economy will add to profitability pressures for banks and create additional asset quality stress, said a report by rating agency Icra on Wednesday.

Icra said that while a loan repayment moratorium, if provided by the Reserve Bank of India (RBI), could assuage asset quality concerns, the inherent stress will keep building up. Moreover, while bank repayment schedule can get extended, the report said, debt capital market instruments unlikely to be rescheduled.

“Borrower leverage is likely to go up with additional working capital requirements and profitability pressures, but credit growth to remain slow amid muted economic activity, likely to remain below 6% in FY21,” Icra said.

According to Icra, State Bank of India’s (SBI’s) announcement of additional working capital limits on temporary basis to tide over liquidity crisis is positive for its borrowers. Mint reported on Wednesday that while State Bank of India (SBI) and Union Bank of India have sanctioned emergency credit lines, Bank of Baroda (BoB) and Bank of India are expected to approve something similar in the coming days.

The stretched cash flows of large corporates to impact cash flows of small businesses and the asset quality of both segments, moreover, lower economic activity to compress freight volumes, and impact asset quality of commercial vehicle (CV) financers, as well as CV original equipment manufacturers, Icra said.

The report said that the spread of the Covid-19 has injected a lot of uncertainty into the global and domestic economic outlook and Icra expects a sharp downturn in various manufacturing and services sectors.

“With some large companies involved in production of discretionary items announcing shutdowns, the small and medium enterprise (SME) sector as well as unorganized sector are likely to be adversely impacted,” it said.