According to S&P Global Ratings, the bad loans in the Indian banking sector will rise from 8 percent on 30th June 2020 to almost 11 percent of the total advances on 31st March 2022.
The rating company says it is expected that the toxic-less valued assets on the balance sheets of banks will increase to 10-11 percent of the total advances as the asset clarification relaxations offered to lenders are phased out by the regulator to make it easier during covid-19 times.
S&P Global Ratings also mentions that the financial institutions in India are very likely to have trouble in maintaining their momentum after the decline in new non-performing loans (NPL) from the first half to 30th September 2020. The Supreme Court order barring banks from classifying defaulter accounts as non-performing has also been of immense help. If it were not for this ruling, the non-performing assets of the banks would have been higher by 10-60 basis points(bps).
S&P also states that the collections rates which had improved in the second quarter to an average of 95% may also reduce. Data collected by Mint showed that the order issued by the Supreme court that allowed banks to maintain certain loan accounts as standard despite defaults by borrowers has concealed soured loans that are worth more than ₹26,000 crores.
The increased economic activity post lockdown has helped this trend which is also aided by the financial savings of the borrowers. However, due to the unstable and soft state of the economy, it is possible that savings may wane and this could possibly hurt future collections.
The RBI has allowed for the one-time restructuring of loans which could help the declination of slippages in the current fiscal but may delay recognition in the next year. Although the permission is granted by the RBI, restructuring has met with little demand which is expected to grow in December.
Although India is not putting many restrictions like some other banking jurisdictions, RBI has allowed loan restructuring for banks due to covid-19. S&P Global Ratings says that it does not recognize restructuring as a solution to all the problems in the banking sector.