Global rating agency in its recent report has revealed a major worry for Indian banks. That, on recovering dues and recognizing NPAs.
"The Covid-19 pandemic may set back the recovery of India's banking sector by years, which could hit credit flows and, ultimately, the economy," S&P said in its latest report.
Operational outages and recession owing to the impact of the coronavirus are also expected to have a long-lasting impact on lenders than previously assumed. The agency estimates gross NPA ratios to rise by 14% in the next fiscal from 8.5 percent in fiscal year 2019-20.
India's apex bank has already deferred EMI pay-outs to September on loan repayments. The Supreme Court is hearing a case on whether banking customers should pay interest for months the EMIs are deferred. The RBI has conceded that a waiver will leave a Rs 2.01 lakh crore hole on the Indian banking system.
For India Inc, a one time loan restructuring for stressed accounts is being speculated as the RBI's next move. However, experts have opined that the RBI may be contemplating on the worries related to NPA recognition, asset quality review and credit costs for banks.
In the event of an RBI restructuring policy, the NPAs could come down to 6 percent and loan slippages could be reduced for this year says S&P. However, loan recoveries will be thrown back by "years" which will further lead to a spike in industry's non-performing assets (NPAs) ratio.
According to its credit analyst Geeta Chugh, non-bank finance companies (NBFCs) will be more hit as compared to banks because of lending to weaker sections, reliance on wholesale funding, and liquidity difficulties because of a higher proportion of borrowers opting for default.
The agency said the NPAs have been reducing over the past 18 months, after hitting a peak of 11.6 per cent in March 2018, when the RBI had undertaken an exhaustive asset quality review leading to emergence of high amounts of hidden stress being revealed.
From a sectoral perspective, it said airlines, hotels, malls, multiplexes, restaurants, and retail may see a significant loss of revenue and profits due to the outbreak, while highly leveraged sectors like real estate developers, telecom companies and power firms may remain a source of increased bad debt, it said.
Micro, small and medium enterprises will be the most vulnerable, but the government's loan guarantee scheme will be of help to them, it said, adding there can be more bad loans from the retail sector especially in the unsecured loans segment.
As the overall confidence dips, credit growth will be "anemic" and will be in the low single digits for FY21, it said.
The state-run banks need up to Rs 40,000 crore in capital support from the government during the current fiscal, which is higher than what it has pumped in the past, the rating agency said.