Home / Industry / Banking /  Banks likely to see fewer loan recast requests, says Icra

The loan restructuring volume of Indian banks is likely to be lower at 2.5-4.5% of advances from the earlier estimates of 5-8%, as fewer borrowers are expected to submit recast requests, Icra said on Monday.

The rating agency said that sharper-than-expected recovery in economic activity and liquidity support by the government through the emergency credit line guarantee scheme have helped reduce debt recast requests.

The asset quality of banks is also expected to improve with net non-performing assets (NPAs) declining to 2.4-2.6% by March 2022, with expectations of sustained collections and lower restructuring, said Anil Gupta, sector head, financial sector ratings, Icra. “This will lead to lower credit provisions and better profitability in FY22," he said.

Icra expects credit provisions to decline to 1.8- 2.4% of advances in FY22 from 2.2-3.1% in FY21 and 3.1% in FY20, which will lead to improvement in return on equity (RoE) for banks. It also expects public sector banks to break even after six consecutive years (FY16-FY21) of losses and generate RoE of 0.0-5.4% in FY22.

The RoE for private banks is estimated to improve to 9.5-10.5% in FY22, it said.

Improved asset quality and the consequent lower credit provisions could drive better profitability for banks and provide impetus and rejuvenate their lending decisions, the rating agency said.

Low interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year, it said.

However, as the moratorium on loan repayments is over and the Supreme Court’s final judgement is awaited on it, gross and net NPAs for the banks are likely to rise in the near term to 10.1-10.6% and 3.1-3.2%, respectively, by March 2021.

The capital position for large private banks is strong and they can withstand the stress case scenario for asset quality as these banks have raised 54,400 crore of capital during the first nine months of FY21, Icra said. The banks are also well-placed to exercise call options on the 26,000 crore AT-1 bonds due in FY22 and FY23 without much of an impact on their capital, with expectations of improved profitability, it said.

ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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