Ind-Ra revises banking sector outlook to negative on stressed assets, high credit costs

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The PSBs’ modest capital buffers are expected to deplete further in FY21, due to provisioning requirements

India Ratings and Research (Ind-Ra) revised its outlook on the banking sector to negative from stable for the second half of this financial year.

This is in view an expected spike in stressed assets, higher credit costs, weaker earnings on account of interest reversals and lower fee income, and muted growth prospects in the wake of the measures taken to contain the spread of COVID-19, the agency said on Friday.

Additionally, capital buffers for most public sector banks (PSBs) remain modest, As per Ind-Ra’s bear case, the spike in stressed assets due to pandemic is expected to double the credit costs for banking system than estimated pre-COVID-19 levels for FY21.

The agency revised the rating outlook on public sector banks (PSBs) to negative for 2HFY21 from stable.

“The PSBs’ modest capital buffers are expected to deplete further in FY21, due to provisioning requirements. Also, pre-COVID profitability expectations for FY21 would be belied and most banks are likely to report net losses,” said the rating agency.

They may also need to continue to build-up their provision cover in FY22 for restructured assets as some of the restructured assets could turn NPA in FY23, it added.

The state-run banks could require Rs 35,000-55,000 crore in 2HFY21 for Tier 1 ratio of 10 percent. The COVID-19 and contingent provisions are much lower than that for private banks.

Ind-Ra maintained a stable outlook for private sector banks, as they are better placed to withstand the challenges presented by the pandemic.

“Most large banks have strengthened their capital buffers, built contingent provisions and have been proactive in managing the loan portfolio. While the system’s credit growth could remain anaemic, and short-term financial performance could deteriorate modestly, large banks may benefit from credit migration,” Ind-Ra said.

As opportunities arise, these banks are in a position to gain substantial franchise growth in the medium term, given that they have also added to their capital buffers over the past few months.

The restructuring/slippages quantum from the corporate sector in FY21 could range between 3 percent-5.8 percent of the banking credit amounting to Rs 3.3 lakh crore-6.3 lakh crore; even stressed assets that may not slip in the near term could be restructured as COVID-19 would have aggravated stress.

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