Indian banks’ Asset quality ratio worsen over the next couple of years as a result of the pandemic crisis. The impairment ratios could rise by as high as 200-600 basis points (bps), depending on the severity of stress and banks’ individual risk exposures.
Further on the Asset quality ratio worsen, the impaired loan ratio will show an upward trend due to both lower loan growth and higher fresh slippages. The after effect will be spread over the next 2 years of FY21 and FY22.
This will show the impact of fresh slippages and it will only be reflected meaningfully after regulatory forbearance ends in August this year.
“Signs of impending pressures were evident in the early Q4FY20 results from private banks, which will increase from H1FY21 despite the relief measures announced by the authorities,” said Fitch, the rating agency.
The slowdown will pressurize sectors and segments towards a asset quality ratio worsen. Private lending institutions have either better asset quality or loan-loss cover than PSBs, but remain exposed due to their large retail books.
The unsecured personal loans and credit cards have a high risk of impairment. The secured automobile loans are relatively more resilient, they will not be isolated from stress as unemployment rises.
Talking about Public sector banks (PSBs) and asset quality ratio worsen the report said “They are, therefore, more exposed to risks from this segment as SMEs have very little tolerance to such large-scale cash flow disruption. We also expect a significant rise in delinquencies from stressed corporate sectors,”.
The financial profiles are expected to weaken across all banks, and the PSBs are most at risk. Stressed corporate sectors such as tourism, auto, infrastructure, real estate, and NBFCs are vulnerable, but granular loan categories such as small enterprises and retail are also high-risk.
“With slippages rising across sectors, Fitch believes that the banks’ average loan-loss cover of around 65% will be inadequate, resulting in banks incurring significant loan-impairment charges amid falling growth and income levels,” the report said on asset quality ratio worsen.
“PSBs are under pressure from the authorities to lend more to the affected sectors, but their ability to do so is limited without significant recapitalisation from the state. They face a high risk of capital erosion, yet their ability to access capital markets is affected due to a sharp discount on their equity valuations”, analysts at Fitch wrote.
Private lending firms have stronger loss-absorption buffers than PSBs. Their although the risk of regulatory breach is low, higher capitalisation may prove vulnerable under extreme stress.