Banks could see an addition of fresh bad loans worth ₹1.5-2 trillion over the next one year, credit rating agency India Ratings said.
While the stress in the corporate loan book has peaked, there is a stock of ₹3.5 trillion of bad loans which is not recognized and remains standard on the books of banks, according to India Ratings’ banking sector outlook report.
The agency expects nearly 40% of this to turn into non-performing assets over the next two years.
Currently, the total stock of stressed corporate loans with interest coverage ratio of less than 1.5 times constitutes 19.3% of the total loan book.
The report, however, added that the provisioning impact of these loans will be minimal as these are smaller accounts of less than ₹2,000 crore each.
The rating agency expects infrastructure and power to contribute to higher provisioning over the next two years.
“We estimate the eventual credit costs over FY19 and FY20 could be between 1.9% and 4.4% of net advances depending on pace of resolutions of corporate NPAs. Fresh slippages in 2HFY19 to 1HFY21 in worst case could be about 40-50% of the ₹3.5 trillion unrecognized corporate stressed assets with interest coverage ratio < 1.5x. These would mostly be accounts with borrowings of INR 20 billion and could attract provisions of about 25% (included in the aforementioned credit cost estimates) over the same period," said India Ratings associate director Jindal Haria in the report.
The report also warned there are early signs of stress building up in the retail loan portfolio. The growth in retail credit over the past three years is not supported by a commensurate growth in wages and employment.
For instance, retail credit grew at 17.8% over fiscal year 2015 to 2018, compared with average employment growth of 6% and wage growth of 2.1%.
However, according to Reserve Bank of India’s latest financial stability report, gross NPA ratio of banks is expected to decline from 10.8% in September 2018 to 10.3% in March 2019 and 10.2% in September 2019.
The India Ratings report also said competition for deposits will intensify in fiscal year 2020 as borrowings for banks remain high despite weak credit growth.
According to the rating agency, private sector banks are more likely to raise deposits even at higher rates as advances growth outpaces deposit growth.
The system credit growth is expected to pick up to about 13% year on year in FY20 with private sector banks driving the growth.
Separately, the ratings agency also reported a negative outlook on non-banking finance companies in the wholesale lending especially lending to real estate developers, large ticket housing and loan against property segments.
“Wholesale NBFCs, especially those financing real estate developers, could face heightened credit cost pressures due to a prolonged slowdown in the real estate sector and lower refinancing in the wake of weak system-wide liquidity," the report said.
The rating agency expects few NBFCs to overhaul their balance sheet by replacing short-term borrowing with long term funds, following the recent liquidity crisis.
It also expects tight liquidity condition to prevail for NBFCs throughout FY20 and sees consolidation among some of these players.