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Business News/ Industry / Banking/  Debt recasts by banks to be lower than estimated at 2.5-4.5% of loans: Icra
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Debt recasts by banks to be lower than estimated at 2.5-4.5% of loans: Icra

Icra expects credit provisions to decline to 1.8-2.4% of advances during FY22 from an estimate of 2.2-3.1% in FY21 and 3.1% in FY20, which will lead to improvement in return on equity for banks

Loan recast requests are much lower than previously estimated, supported by sharper-than-expected improvement in economic activities as well as liquidity support through emergency credit line guarantee schemePremium
Loan recast requests are much lower than previously estimated, supported by sharper-than-expected improvement in economic activities as well as liquidity support through emergency credit line guarantee scheme

MUMBAI: Indian banks are expected to restructure loans of fewer borrowers than was originally estimated, with 2.5-4.5% of advances now likely to get recast, rating agency Icra said on Monday.

It said that loan recast requests are much lower than previously estimated, supported by sharper-than-expected improvement in economic activities as well as liquidity support through emergency credit line guarantee scheme. Accordingly, Icra has revised the estimate downward to 2.5-4.5% of advances as against 5-8%, estimated earlier.

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Anil Gupta, sector head – financial sector ratings, Icra said, with expectations of sustained collections and lower restructuring, the asset quality is expected to improve further with net non-performing asset (NPA) declining to 2.4-2.6% by March 2022.

“This will lead to lower credit provisions and better profitability in FY2022," said Gupta.

Icra expects the credit provisions to decline to 1.8-2.4% of advances during FY22 from an estimate of 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 return on equity of 0.0-5.4% for FY 2022.

The RoE for private banks is also estimated to improve to 9.5-10.5% in FY 2022, it added.

According to the rating agency, improved asset quality and consequently lower credit provisions could drive better profitability for banks and provide impetus to lenders and rejuvenate their lending decisions.

Low interest rates, improved business volumes, better job prospects and income levels could also stimulate credit demand next year, it said. However, as moratorium on loan repayments is over and the Supreme Court’s final judgement is awaited, gross NPAs and net NPAs for the banks are likely to rise in near term to 10.1-10.6% and 3.1-3.2%, respectively, by March 2021.

Meanwhile, the capital position for large private banks is strong and can withstand the stress case scenario for asset quality after these banks raised 54,400 crore of capital during the first nine months of FY21, it said.

With large capital raise and expectations of improved profitability, Icra said, the banks are also well-placed to exercise call options on their 26,000 crore of AT-1 bonds falling due in FY22 and FY23 without a significant impact on their capital. The rating agency expects capital requirements for private banks to be limited to few mid-sized and small private banks at less than 10,000 crore till FY22.

“Public (sector) banks will need to raise additional capital of up to 43,000 crore next year as they have call options falling due on the AT-1 bonds totalling 23,300 billion during FY22. Ability of public banks to raise capital from markets will be critical to reduce government’s recapitalisation burden next year," added Gupta.

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ABOUT THE AUTHOR
Shayan Ghosh
Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years 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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Published: 28 Dec 2020, 06:05 PM IST
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