The banking system's gross non-performing assets are set to decline to at least 7.1 per cent by March 2022, as against 7.6 per cent at FY21-end, domestic rating agency ICRA said on Wednesday.
The NPAs will be lower on account of higher recoveries and upgrades, and also faster credit growth, ICRA said, adding that the fresh accretion to the NPAs will be higher in FY22 due to the absence of any regulatory dispensations like moratoriums.
"..the GNPAs and NNPAs (net NPAs) are expected to decline to 6.9-7.1 per cent and 1.9-2.0 per cent, respectively by March 31, 2022," it said.
The Reserve Bank's financial stability report had said the GNPAs at March 2021 had come at 7.6 per cent and estimated it to rise to 9.8 per cent in FY22-end under its base-case assumptions.
RBI Governor Shaktikanta Das had said the dent on balance sheets and performance of financial institutions in India has been much less than projected earlier, but a clearer picture will emerge as the effects of regulatory reliefs fully work their way through.
The rating agency said the fresh NPA generation declined to Rs 2.6 lakh crore or 2.7 per cent of advances in FY21 compared to Rs 3.7 lakh crore or 4.2 per cent in FY20 and added that the same will be higher in FY22.
The headline asset quality numbers of banks do not reflect the underlying stress on the income and cash-flows of the borrowers impacted because of Covid-19 and various regulatory and policy measures such as the moratorium on loan repayment, standstill on asset classification and liquidity extended to borrowers under Emergency Credit Line Guarantee Scheme (ECLGS) had a positive impact on the reported asset quality of lenders.
"In the absence of standstill on asset classification, we expect the fresh NPAs generation to be higher, however, we also expect the recoveries and upgrades to improve in FY22," it said, adding that the first half of the ongoing fiscal can see higher accretions due to the second wave of the pandemic.
The credit provisions for the banks moderated to 2.5 per cent of advances in FY21 compared to 3.7 per cent in FY20, even as the core operating profits improved with cost curtailment measures.
"Within the sector, the turnaround was remarkable for public sector banks, which reported profits after five consecutive years of losses and with NNPAs at lowest levels seen over last six years (3.1 per cent as on March 31, 2021), ICRA expects the public sector banks (PSB) to remain profitable going forward," its vice president for financial sector ratings Anil Gupta said.
After the capital raising exercises, the improved capital positions coupled with lower NNPAs mean better solvency profile as well as an improved outlook on the ability to support growth and better future profitability, he added.
"We believe that the banks are relatively better placed to handle the stress from the second wave and hence we continue to maintain a stable outlook on the sector," Gupta said.