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Asset quality surprised in FY21 but borrower stress unaccounted for: Icra

Icra said that various regulatory and policy measures such as moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Emergency Credit Line Guarantee Scheme (ECLGS) had a positive impact on reported asset quality of lenders. (Mint)Premium
Icra said that various regulatory and policy measures such as moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Emergency Credit Line Guarantee Scheme (ECLGS) had a positive impact on reported asset quality of lenders. (Mint)

  • Reported gross non-performing assets (NPAs) and net NPAs have declined to 7.6% and 2.5%, respectively as on 31 March 2021, compared to 8.6% and 3%, respectively in the year-ago period.

Although asset quality of banks has surprised positively in FY21, headline asset quality numbers of banks do not reflect the underlying stress on income and cash-flows of the borrowers hit by covid-19, rating agency Icra said on Wednesday.

Reported gross non-performing assets (NPAs) and net NPAs have declined to 7.6% and 2.5%, respectively as on 31 March 2021, compared to 8.6% and 3%, respectively in the year-ago period. This was despite much lower estimates of loan restructuring at around 1.3% of advances as against 5-6% estimated earlier. The fresh NPA generation has also declined to 2.6 trillion in FY2021 compared to 3.7 trillion in FY2020.

Icra said that various regulatory and policy measures such as moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Emergency Credit Line Guarantee Scheme (ECLGS) had a positive impact on reported asset quality of lenders. However, as the overdue loan book continues to remain at elevated levels, the second wave could push some of these borrowers into NPAs in the first half of this financial year, it said.

“Within the sector, the turnaround was remarkable for public sector banks which reported profits after five consecutive years of losses and with NNPAs at lowest levels seen over last six years. Icra expects the public sector banks (PSB)s to remain profitable going forward," said Anil Gupta, vice-president (financial sector ratings), Icra.

Meanwhile, the Reserve Bank of India (RBI) also extended the restructuring scheme for retail and small business loans till 30 September and recently the government also upsized the ECLGS funding to 4.5 trillion from 3 trillion budgeted at the time of first wave. While this is likely to increase the indebtedness of the borrowers, it could provide temporary liquidity relief to tide over the crisis induced by second wave, it said.

In absence of standstill on asset classification, Icra said it expects fresh bad loan generation to be higher, however it also expects recoveries and upgrades to improve in FY22. This coupled with a credit growth of 7.3-8.3% in FY2022, the gross NPAs and net NPAs are expected to decline to 6.9-7.1% and 1.9-2.0% ,respectively by 31 March 2022.

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