Slippage risks are easing for PSBS: Moody’s
Public sector banks (PSBS) in India may not see a sharp deterioration in asset quality because of the Covid-19 pandemic, said global rating agency Moody’s on Thursday, helped by an expected economic recovery next fiscal year.
However, banks will continue to face capital shortages as their profitability remains weak given high credit costs, leaving them vulnerable to any unexpected stress, it said. This is despite a likely government equity infusion.
“Various measures by the Indian government to support borrowers have helped curb growth in PSBS’ non-performing loans, and the volume of restructured loans is not as large as we anticipated,” said Rebaca Tan, a Moody’s assistant vicepresident and analyst.
Asset quality of the five largest PSBS that Moody’s rates — State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India — improved mildly in the first nine months FY21 despite an economic contraction.
The gross non-performing asset (NPA) ratios of the five banks declined by an average of about 100 basis points as of the end of 2020 from a year ago. This is so even after including loans that have become delinquent since the end of August 2020 but are not formally classified as NPAS because of a pending case in the Supreme Court.
While gross NPA ratios remained high at most banks, net NPA ratios were much lower because of the build-up of significant provisions against legacy NPAS.
NPA recoveries slowed across all five banks in the first nine months of fiscal 2021 over FY20. The pandemic not only caused economic disruptions but also led to the suspension of resolution proceedings under the Insolvency and Bankruptcy Code until March 2021, it said. However, recovery is expected to gradually pick up in the next few quarters as the economy recovers.
The government plans to infuse ~20,000 crore in equity capital into PSBS in FY22 on top of the ~20,000 crore budgeted in FY21.
“While the capital infusion will help them meet Basel capital requirements, it will not boost credit growth,” added Tan.