The banking sector had a litany of bad news on Thursday with two rating agencies warning about the mounting bad loans problem and the poor capital position and placing the sector on a negative outlook. While domestic agency Crisil has forecast a spike in NPAs to 10.5 per cent by March and the system level stress at Rs 11.5 trillion, or 14 per cent, its global rival Fitch placed the banking sector under a negative outlook.
Crisil said since banks have only recognised two- thirds of their stressed loans as NPAs, “bad loan ratio is set to rise by 1 percentage point to 10.5 per cent by March 2018 up from 9.5 per cent in March 2017, which included only two- thirds of the overall stressed assets.” The agency estimates total amount of stressed loans, which includes NPAs and standard assets that are under pressure currently and could deteriorate into NPAs, to be at Rs 11.5 trillion, or 14 per cent of the system.
Citing vulnerable capital position due to high bad loans and poor loan growth, Fitch said, “The negative outlook is based on our assessment that the banking sector's weak core capitalisation continues to pose downside risks to standalone credit profiles amid expectations of continued poor loan growth, weak earnings, volatile asset quality and elevated credit costs.”
It warned asset-quality outlook will remain challenging in the next 12 months due to incipient stress in the power sector and concerns about farm loan waivers and SMEs and pointed out that banks will need $65 billion in additional capital to meet Basel III requirements by March 2019 with state banks alone needing over 90 per cent of this.
“The Government will have to pump in significantly more even on a bare minimum basis if it is to address the system-related risks of a huge NPAs, weak provision cover and poor loan growth,” Fitch report said. It, however, added that private-sector banks are well- placed although despite being under pressure due to deterioration in asset quality.
Crisil said assets under pressure comprise the not- yet recognised bad loans which are recognised as NPAs in one bank, but not in others, restructured standard accounts, and stressed assets structured under schemes such as the strategic debt restructuring, the 5/25 and the S4A. “Gross NPAs will be 10.5 per cent of advances by March 2018, up from 9.5 per cent in March 2017,” Crisil said, adding infrastructure, power, engineering, and construction sectors contribute bulk of the stressed assets.