Banking Asset quality needs to be monitored


Customers wearing protective masks wait in line at an ICICI Bank Ltd. branch on a near-empty street in Mumbai, India, on Monday, May 4, 2020. India’s central bank Governor Shaktikanta Das and the chief executive officers of the nation’s banks have discussed ways to ensure credit flow to businesses once the world’s toughest stay-at-home order ends. Photographer: Dhiraj Singh/Bloomberg

RBI has released a report on Trend and Progress of Banking in India in 2019-20. Its broad theme is the impact of COVID-19 on banking and non-banking sectors and the way forward. Following are the key highlights:

The GNPA ratio of scheduled commercial banks (SCBs) declined from 9.1% in Mar’19 to 8.2% in Mar’20 and 7.5% in Sep’20. With a substantial increase in provisioning, the net NPA ratio of SCBs moderated to 2.8% by Mar’20 and fell further to 2.2% by Sep’20.

Capital to Risk (Weighted) Assets Ratio of SCBs strengthened from 14.3% in Mar’19 to 14.7% in Mar’20 and 15.8% in Sep’20, aided by re-capitalisation of PSBs and capital raising by both public and private sector banks.

Net profit of SCBs turned around in FY20 after losses in FY18-19. During H1FY21, performance was further shored up by the moratorium on EMI payments, standstill in asset classification, and ploughing back of dividends.

The consolidated balance sheet of NBFCs decelerated in 2019-20 due to near stagnant growth in loans and advances, although some improvement was visible in H1FY21. Notwithstanding a marginal deterioration in asset quality, the NBFC sector remains resilient.

The share of special mention accounts (SMA-0) witnessed a sharp rise in Sep’20. This may be initial signs of stress after the lifting of moratorium on 31 Aug’20.

Valuation and view

We remain watchful on the asset quality of banks as they recognise NPLs from the moratorium/overdue loans though overall trends have fared better than earlier expectations. Large banks reported a collection efficiency of 95-97%, while the same for mid-size banks/MFI focused players stood in the early 90s. Though slippages are likely to increase over H2FY21, particularly after the SC order ended the moratorium on 31 Aug’20, many banks already carry an additional provisions buffer, which should limit the impact on profitability, even as credit cost remains elevated. Our top Buys remain: ICICIBC, HDFCB, SBIN and AUBANK.


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