Banks to see Rs 2,000,00-crore dud loans in two years

Banks to see Rs 2,000,00-crore dud loans in two years

AgenciesUpdated: Wednesday, May 29, 2019, 02:47 AM IST
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Mumbai: Stressed loan pool of Rs 1.5-2 lakh crore of Indian banks may turn non-performing by September 2020, India Ratings and Research said on Tuesday. The banks may have to provide an additional up to Rs 40,000 crore towards loans, which could potentially turn sour between October 2018 and September 2020, the rating agency said. Within stressed corporate assets of Rs 13.5 lakh crore to Rs 14 lakh crore in banks, about Rs 3.5 lakh crore are unrecognized by lenders. This highlighted the fact that these loans are still being serviced by borrowers, and categorized as “standard” on banks’ books, it said.

The slippage from the unrecognised accounts may to lead to sharp jump in provisioning because most of these accounts are not large enough to attract accelerated provisioning, said Jindal Haria, associate director – banking and financial institutes at India Ratings and Research. He also said that since there will be considerable time for these accounts to turn into doubtful category, banks will have adequate time to make required provisioning. Haria said that provisioning on the recognised pool of gross bad loans aggregating Rs 9.5 lakh crore was at an adequate level.

However, the future provisioning will be based on the ageing of bad loans. Of the Rs 13.5-14 lakh crore stressed corporate loans, banks have recognised only Rs 10 lakh crore as of September 2018, he added. Banks have to increase provisioning if an account remains non-performing for a longer time. “The cap on credit costs shall be established by ageing and would be around 4.4 per cent, spread over FY19 and FY20. India Ratings “bottom-up assessment for loss given default on stressed corporates indicate a best case (floor) credit cost of 2 per cent”, the agency said.

However, total credit cost or provisioning will also be contingent on recoveries of large bad loans. The rating agency said that the retail credit segment needs continuous monitoring in terms of asset quality, given the current slowdown in employment and sluggish wage growth. India Ratings maintained a stable outlook on State Bank of India and Bank of Baroda, and reinstated the negative outlook on remaining public sector banks for the next financial year.

The agency said that mid-size and smaller public sector banks have weak capitalisation, lower provision coverage, and a larger stock of unrecognised assets across non-corporate segments. In FY20, all banks on which we have a stable outlook might see moderate write-backs of provisions on corporate assets, depending on the pace of resolutions, it said.

The top 40 assets under the NCLT resolution regime are worth Rs 4.50 lakh crore for which banks have made provisions for 70-75 percent, the agency said in a report. Over FY19 and FY20, credit cost from stressed corporate assets will depend on ageing/resolution/ liquidation, if any, the report said, adding the cap on credit cost shall be established by ageing and will be around 4.4 percent, spread over FY19 and FY20.

The agency estimates the quantum of government capital infusion (Rs 1.94 lakh crore) in FY18 and FY19 to be around 33 percent of the state-run banks’ equity base as of the first half of FY19. “This would largely cover the provisioning cost, especially on stressed corporate loans and meet the minimum Basel III requirements by March 2020,” it said.

The agency expects state-run banks would require incremental capital of about Rs 66,000 crore from the fourth quarter of FY19 through FY20, which is needed for a credit expansion of 10-11 percent in FY19 and FY20 each. This capital infusion, however, is not adequate to cover the impact of Ind-AS which could be substantial, the agency said in the report.

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