Loan recasts may push NPAs to 14% in FY21

Mumbai: Amid reports of the RBI mulling restructuring of loans, global rating agency S&P on Tuesday said that a loan recast will only defer NPAs recognition and not solve the problem.

The agency also said operational outages and the recession because of the pandemic will have a deeper and longer impact on lenders than previously assumed, and estimated the gross non-performing assets ratio to rise up to 14 per cent in FY2021 from the 8.5 per cent in FY2020.

"The Covid-19 pandemic may set back the recovery of India's banking sector by years, which could hit credit flows and, ultimately, the economy," the agency said. The coronavirus pandemic has led to prolonged lockdowns and a chilling of economic activity, forcing the RBI to declare a six-month voluntary moratorium on loan repayments till September. The RBI, which had stopped the practice of loan forbearance, is reportedly mulling to reintroduce restructuring with a few safeguards. Restructuring may not resolve the problem. It may just defer NPL (non-performing loans) recognition, as it did a few years ago, the agency said. It reminded that in the past, rampant restructuring had led the RBI to come up with an asset quality review and withdrew forbearance on the majority of restructured loans, leading to exceptionally high credit costs on banks.

In its base case, the agency expects slippages or the addition to the NPAs to come at 6 per cent during the fiscal. If the RBI allows for the restructuring of loans, it may reduce the loan slippages this fiscal, it noted.

Loan recoveries will be set back by years because of the Covid-19 pandemic, which will lead to a spike in the industry's non-performing assets (NPAs) ratio, it said. The NPAs of the Indian banks will shoot-up to 13-14 per cent at the end of FY2020-21, up from the 8.5 per cent in FY2020, Standard & Poor's credit analyst Deepali Seth-Chhabria said.