The banking system's gross non-performing assets are set to decline to at least 7.1 percent by March 2022, as against 7.6 percent at FY21-end, a domestic rating agency said on Wednesday. The NPAs will go lower on 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.

Share Market Live

NSE

The GNPAs and NNPAs (net NPAs) are expected to decline to 6.9-7.1 percent and 1.9-2.0 percent 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 percent and estimated it to rise to 9.8 percent 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 percent of advances in FY21 compared to Rs 3.7 lakh crore or 4.2 percent 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 percent of advances in FY21 compared to 3.7 percent in FY20, even as the core operating profits improved with the 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 the lowest levels seen over the last six years (3.1 percent as of 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.