Banking Sector Beginning New NPA Cycle in Aftermath of COVID-19: Report
The coronavirus (COVID-19)-led lock-down has intensified the domestic macroeconomic concerns on gross domestic product (GDP) growth, employment growth and demand-supply. With a significant drop in the economic activity, India Ratings and Research (Ind-Ra) expects most sectors in India to experience varying degrees of revenue contraction during FY20-21, due to demand and supply disruptions. This presents fresh challenges for banks which over the past four years have been reeling under corporate stress, says Ind-Ra. 
 
In a note, the ratings agency says, "Banks faced elevated provisions resulting from the corporate stress cycle over FY15-16-FY19-20 and as per our estimates, banks had largely provided for the existing corporate stress and were progressing towards a more moderated credit cost cycle. However, the COVID-19 related measures are likely to result in another cycle of stress."
 
Ind-Ra says it believes the COVID-19 situation will significantly aggravate the stress in retail portfolio, specifically the unsecured portfolio; in the last 5 years, the delinquencies have increased by 50%.The impact could be higher especially for private sector banks whose unsecured retail portfolio accounts for 16.6% of the total bank credit as against 6.3% for public sector banks (PSBs). 
 
 
 
According to the ratings agency, credit costs may increase up to 2.8% for the system. It says, the pre-COVID credit costs estimates for FY20-21 show an increase up to 60%, which would bring the profitability of most PSBs under pressure for FY20-21. "The credit costs for the system thus could increase up to Rs2.7 trillion in FY20-21; around 70% of which could be attributed to PSBs. If the accelerated provisioning regime is reinstated, then there could be additional credit costs of 0.3%-0.6%. This could require the government to infuse additional capital into PSBs," it added.
 
The significant disruption and loss of economic activity across all the domestic sectors has led to a sharp downward revision in economic growth prospects for FY20-21. Ind-Ra has already revised its GDP estimates for FY20-21 to 1.9%, lowest in 29 years (FY1991-92: GDP grew 1.1%).
 
Additionally, the pressure on non-corporate segments, which was already visible pre-COVID-19, is likely to intensify. Hence, as per Ind-Ra’s analysis, COVID-19 may drive total slippages of up to Rs5.5 trillion (5.7%) in Ind-Ra’s post COVID-19 stress case. 
 
According to Ind-Ra, the corporate slippages in FY20-21 would increase to Rs3.4 trillion.
 
Based on Ind-Ra’s vulnerability framework and corporate stress analysis of 30,000 corporates, the total corporate standard-but-stressed corporate pool may increase from 3.8% of the total bank credit as of December (pre-COVID-19 levels) 2019 to up to 6.6% under Ind-Ra’s post COVID-19 corporate stress case. 
 
"The incremental stress is mainly from sectors including power, infrastructure, constructions, hospitality, iron & steel, telecom and realty. Out of this, the agency estimates corporates exposures of up to 3.2% of total bank credit are at a high risk of slippage," the ratings agency added.
 
Furthermore, Ind-Ra assessed the top 500 debt-heavy corporates or over 70% of corporate credit spread across 35 sectors. As per Ind-Ra’s analysis, the discretionary consumer segment is likely to have a deep ‘U’ shaped recovery with recovery beginning in first quarter (1Q) of FY21-22 than other three segments ‘essential, steady state and a cyclical sectors’, ‘non-discretionary consumer goods and critical infrastructure’ and ‘industrial goods & services and cyclical sectors’ which are likely to recover at some points in FY20-21. 
 
Ind-Ra says in its view, the GDP slowdown due to the COVID-19 outbreak will aggravate the stress and slippages in the non-corporate segments—retail, agriculture and micro, small and medium enterprise segments. 
 
The ratings agency expects about 40% of the incremental slippages could come from the non-corporate segments. 
 
The measures announced by the government as a part of economic package are mid- to long-term measures; hence, in agency’s opinion if these are implemented in a timely manner, it could aid materially to reduce the expected stress in micro, small and medium enterprises. 
 
In Ind-Ra’s analysis, the capital requirement under the benign provision regime for PSBs would range from Rs300 billion-Rs550 billion; this also factors in the volatile markets for additional tier 1 bonds and hence limited traction in the same. 
 
"If the accelerated provisioning regime is reinstated, then the capital requirement could further increase up to Rs400 billion to maintain Tier 1 capital of 10%, which is 50 basis points (bps) higher than regulatory requirement that comes into action post September 2020," Ind-Ra says.
 
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    COMMENTS

    soundararajanmk

    3 days ago

    When do the PSBs propose to present their audited financial results for FY 2019-20. Will it present true picture or cooked figures? We share holders and public are anxious to know the true status of these PSBs, functioning under the directions of political parties ruling the our country. How long they propose to keep us under suspense?

    Ramesh Popat

    3 days ago

    It will be officially hidden for one yr at least. and then extension of that again!!

    Indian NBFI Funding, Liquidity Risk Yet To Ease; Support Measures Hinge on Execution: Fitch
    Indian non-bank financial institutions' (NBFI) funding and liquidity will continue to face pressure despite a pick-up in loan collections. While gradual easing of the coronavirus pandemic-related shutdown should strengthen loan receipts, any improvement should be viewed in relation to the depressed levels in April 2020, says Fitch Ratings, adding, it expects near-term collections to fall well short of pre-pandemic repayment schedules.
     
    Elaine Koh, director for NBFIs at Fitch Ratings, says, “The success of India’s latest pandemic-related support measures for NBFIs will hinge on effective execution and lower risk aversion by banks, but risk to NBFIs’ asset quality and liquidity will linger.”
     
    In a report, the ratings agency says, additional support initiatives announced by the Indian government last week could help to address some earlier policy gaps, but successful implementation will be key and India has a mixed record on this front. "Furthermore, we expect collections for the next few months to continue to fall well short of pre-coronavirus repayment schedules even though NBFI loan receipts should improve from April's depressed levels as coronavirus-related curbs are gradually eased," it says.
     
    The government's latest measures seek to ease borrower strain and boost funding conditions for NBFIs. A fully guaranteed Rs3 trillion (about $40 billion) loan scheme for micro, small and medium enterprises (MSMEs) aims to encourage lenders to continue funding these more-vulnerable entities, while a modest NBFI debt guarantee plan could help smaller but creditworthy non-bank lenders.
     
    Earlier liquidity support measures announced by the Reserve Bank of India (RBI) since late March 2020 have been less effective at relieving the sector’s funding and liquidity pressure. A Rs1 trillion (about $13 billion) bond purchase liquidity facility found its way mainly to top-tier corporate issuers and a handful of better supported NBFIs. Subsequently, a second facility earmarked for NBFI debt was poorly subscribed; only 51% of an initial Rs250 billion tranche (about $3.3 billion) was taken up. 
     
    Fitch says, "The measures largely relied on the banks as funding conduits, but without offering credit or capital protection against exposures taken on. These plans stumbled as banks remained wary of adding credit exposure to already weak balance sheets amid ongoing uncertainty. Instead, banks’ excess liquidity balances in the RBI’s reverse repo facility ballooned, highlighting the risk-averse nature of the broader banking system."
     
     
    According to the ratings agency, the success of these schemes will rest on implementation details that are yet to be released as well as lowering the risk aversion among banks as they are the key intermediaries in the sector. 
     
    The government guarantee schemes for NBFIs announced on 13 May 2020 may help address banks’ risk aversion towards the sector. However, Fitch says, the structure that offers the strongest protection – the fully guaranteed liquidity scheme on investment-grade NBFI paper– only represents around 1% of outstanding NBFI debt. 
     
    "We expect the scheme to benefit small and mid-tier NBFIs in attracting funding due to the full credit risk mitigation – but access is likely to be rationed given the facility’s modest size," it added.
     
    As per the ratings agency, pandemic-related liquidity support measures to date have had limited success in improving funding conditions for the NBFI sector. Local-currency corporate bond spreads have continued to climb despite various attempts to boost credit transmission since early March. Local NBFI bond spreads have been more affected and remained elevated even after the recent announcements. Easing spreads along with increased issuance will be key signals of improved appetite for NBFI debt, Fitch says.
     
     
    The ratings agency feels that the downside risk for NBFIs’ asset quality and liquidity persists, even as the economy restarts. It says, "The economy has suffered significant damage and we expect a lagged recovery. Acceleration in coronavirus cases could impede process and banks – the major source of NBFI funding – are still wary of looming asset-quality pressure."
     
    "We believe NBFIs will continue to face considerable risks to their asset quality and liquidity even as the economy reopens gradually. The number of new COVID-19 cases continues to rise and a significant acceleration could set the process back. Meanwhile, Indian banks - the major source of incremental NBFI funding - remain cautious in the face of looming asset quality pressure," Fitch says.
     
    According to the ratings agency, funding access and liquidity continue to be pressing for the NBFI sector as a whole. This is because, it says, like banks, NBFI borrowers are eligible for a three-month principal repayment holiday under the RBI’s moratorium scheme, but unlike banks, NBFIs are mostly wholesale-funded – with regular debt repayments coming due but without access to a lender of last resort. 
     
     
    “NBFIs’ borrowers also tend to be lower-income and less financially secure, and are hence more likely to require debt relief. Steady access to funds is therefore crucial for NBFIs to meet their obligations while loan collections are hampered by shutdowns and repayment holidays. Some NBFIs may need to draw on existing liquidity resources to meet repayments – though sluggish loan demand should help them conserve cash,” Fitch added.
     
    In late March, Fitch took negative action on its rated Indian NBFI portfolio to reflect the sector's vulnerability to a coronavirus-related downturn. Since then, it says, loan collections have taken a hit amid the extended economic shutdown. 
     
    Fitch-rated NBFIs have retained sufficient funding access consistent with their rating levels over the period, and recent developments are net positive for the sector. "However, conditions remain fragile, and Fitch will continue to monitor underlying developments closely as we look to address the negative watches on our Indian NBFI ratings over the coming months," the ratings agency concludes.
     
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    Swift Implementation Key to Success of Stimulus Package for NBFCs: Ind-Ra
    The stimulus package announced by the Indian government includes multiple measures aimed at providing relief to non-banking financial companies (NBFCs) and micro, small and medium enterprises (MSMEs), which is their target borrower segment. However, ironing out operational challenges and speedy implementation would be key to avoid restricting the benefits to the targeted segment, says India Ratings and Research (Ind-Ra).
     
    In a note, the ratings agency says, "The Rs300 billion special liquidity scheme (free of guarantee cost) can incentivise banks to take exposure in the lower rated investment grade NBFCs. Moreover, banks would be able to have slightly better pricing on these loans, notwithstanding them being proposed to be backed by a government guarantee, on account of the lower bargaining power of the lower rated NBFCs." 
     
    "Having said that, lower rated NBFCs are not active in the bond market and hence investments through non-convertible debentures could create challenges. Furthermore, lenders would be looking at the operational guidelines to understand reimbursement from the government, i.e. if these can be at the time of it becoming delinquent or it is after completion of recovery proceedings," Ind-Ra says. 
     
    The scheme allows for primary and secondary market transactions which can help mutual funds (especially credit funds) sell some of their papers and generate liquidity easing some pressure on them. 
     
    The Rs500 billion equity infusion in MSMEs through the fund of funds route is aimed at increasing the capacity of viable MSMEs. 
     
    Ind-Ra says, "This route of assisting MSMEs may be time consuming as it could involve a valuation exercise regarding the quantum of stake that could be purchased. Given the urgent need of funds for the sector, the modalities of the equity infusion can be time consuming." 
     
    The Rs450 billion partial credit guarantee scheme with 20% first loss protection from the government is aimed at providing some incentive to lenders. Unlike the earlier scheme which was meant only for direct assignment transactions, this scheme now covers even primary borrowings by NBFCs such as bonds and commercial papers. 
     
    This, according to the ratings agency, could provide some liquidity window to small NBFCs, provided lenders have the risk appetite to fund these entities after getting 20% loss cushion. It says, "While the 20% first loss protection in the assignment and securitisation can be a strong incentive if operationalised suitably, investments by lenders in primary papers based on the 20% guarantee would be based on loss estimation by lenders. This may lead to the funds largely flowing to higher rated entities." 
     
    The government has also announced collateral-free loans worth Rs3 trillion for MSMEs (up to Rs0.25 billion outstanding credit and turnover of up to Rs1 billion) and will provide a 100% guaranteed cover on them. About 20% of the outstanding credit could be offered in the form of a term loan of four years with one-year moratorium. 
     
    According to Ind-Ra, this additional funding takes care of the liquidity requirements of these entities for some time and to that extent could prevent them from being classified as non-performing assets (NPAs), which also helps in restricting the jump in credit cost for lenders.
     
    "However, MSMEs may continue to face the pain if the lockdown persists for a longer time and resumption of business operations gets delayed. The real problem facing these companies is demand compression; until that gets resolved, providing loans can only lever the balance sheet, but is not a sustainable solution," the ratings agency concludes.
     
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