Delinquent loans could lead to further slippages in the first half of FY22, according to Icra

The high level of delinquencies on the loan books could push new non-performing assets (NPAs) higher in the first half of the current fiscal year ending September 2021 (H1FY22) amid the spike in Covid cases and of its economic impact. However, the restructuring and improved financing of Rs 1.5 trillion under the Government Guaranteed Credit Scheme could bring some relief to lenders, according to ratings agency Icra.

Banks’ asset quality surprised positively with reported gross NPAs falling to 7.6% in March from 8.6% in March 2020. Net NPAs also fell to 2.5% in March from 3% one year ago. New Generation NPAs also decreased to Rs. 2.6 trillion (2.7% of advances) in FY21 from Rs. 3.7 trillion (4.2%) in FY20 , Icra said.

The ratings agency pointed out that the banks’ overall asset quality figures do not reflect the underlying strain on borrowers’ earnings and cash flows hit due to Covid-19.

Various regulatory and policy measures such as moratorium on loan repayments, status quo on asset classification and extended liquidity under the Emergency Credit Line Guarantee Scheme (ECLGS) have had a positive impact on the quality of lenders’ assets. However, as the delinquent loan portfolio continues to remain at elevated levels, the second wave could push some of these borrowers into NPAs in the first half of FY2022.

While restructuring and emergency credit are likely to increase borrower indebtedness, they could provide temporary liquidity relief to weather the second-wave-induced crisis.

In the absence of a judgment on the classification of assets, the new generation of NPA should be higher. However, recoveries and upgrades could improve in FY2022. This, coupled with credit growth of 7.3-8.3% in FY22 (5.5% in FY21), ARPG could decline to a level of 6.9-7.1% and ARPA to a level of 1.9-2.0% by March 31, 2022.

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