The credit risks will remain high in the country’s financial sector in 2020, despite the recognition of legacy stressed assets and capital infusion by the government in public sector banks, Standard and Poor’s (S&P) said on Tuesday.
India will go through a tug of war on the economy, resolution of bad loans, and health of non-banking financing companies (NBFC). Private-sector banks and top-tier public sector banks with better franchises, profitability, and capitalisation are likely to increase their market share, S&P said in reports on banks in 15 emerging markets.
Reduction in stressed assets is contingent upon the insolvency and bankruptcy process. India’s corporate bankruptcy process has been a mixed bag. The process has yielded recovery rates that are higher than the earlier regime and stabilised non-performing loan (NPL) ratios for the system in the past financial year. However, it is taking longer than originally envisaged.
Large banks have 30 per cent-50 per cent of their NPLs undergoing resolution under bankruptcy proceedings and a sizable amount of this is scheduled to be resolved in the financial year 2020-2021 (FY21). Stabilisation in asset quality is contingent upon these resolutions.
S&P said it expects the Indian government to remain supportive of public sector banks, as reflected in its ongoing recapitalisation plan. Weak operating income at several public- sector banks will make them reliant on government capital infusions. Timely and sufficient infusions are critical for these banks to tide over the provisioning hump. Referring to credit drivers, the rating agency said the Indian economy has cooled off in recent quarters because of weak private consumption and is likely to remain soft in FY20.
The government’s fiscal push in the form of corporation tax cuts, income transfers to farmers, and the Reserve Bank of India’s (RBI) policy rate cuts and transmission may lead to some recovery. “We expect GDP growth of 6.5% in FY21 and 7 per cent in FY22,” it added.
Besides the momentum of economic activity, the volatility in the market would have a bearing on the asset quality of financial sector players. The liquidity has tightened for NBFCs since the Infrastructure Leasing & Financial Services’ default episode in late 2018.
The central bank has conducted open market operations and cut policy rates multiple times. Yields for benchmark government securities have retreated. The government has also signalled liquidity support for the financially sound NBFCs.
Public-sector banks’ purchase of high-rated pooled assets of Rs 1 trillion is eligible for a one-time six months’ partial credit guarantee by the government for the first loss of up to 10 per cent. The central bank is facilitating these transactions by providing banks with a liquidity backstop against their excess holdings of government securities. However, market volatility developments stemming from financial firms may have broader economic effects on financial conditions and borrowers, thus affecting bank asset quality, S&P added.