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Indian Banks' financial strength will not materially recover until FY23: S&P Global Ratings

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Rating agency Standard & Poor’s expects the Indian banking sector’s bad loans to rise to 10-11 percent over the next 12-18 months, up from 8 percent as of June 30, 2020.

Indian Banks' financial strength will not materially recover until FY23: S&P Global Ratings
Rating agency Standard & Poor’s expects the Indian banking sector’s bad loans to rise to 10-11 percent over the next 12-18 months, up from 8 percent as of June 30, 2020. The latest forecast is lower than the earlier one of 13-14 percent, and factors in resumption of economic activity, government’s credit guarantee scheme for MSMEs and buoyant liquidity. But the agency warned that it would take at least another two years before the financial sector’s regains its strength.
“Our NPL estimates are lower than previous but we are still of the view that the sector's financial strength will not materially recover until fiscal 2023 (ended March 31, 2023),” it said in a recent report.
S&P believes that Reserve Bank’s one-time restructuring scheme is helping mask the problem assets for Indian banks arising from COVID-19. It expects 3-8 percent of the banking sector’s loans could get restructured.
“They (banks) and other financial institutions will likely have trouble maintaining momentum after the proportion of nonperforming loans (NPL) to total loans declined consistently so far in 2020,” S&P said.
"While financial institutions performed better than we expected in the second quarter, much of this is due to the six-month loan moratorium, as well as a Supreme Court ruling barring banks from classifying any borrower as a non-performing asset," said S&P Global Ratings credit analyst Deepali Seth-Chhabria.
The agency expects the banking system's credit costs will remain elevated at 2.2-2.9 percent this year and next.
However, what’s worrying is that collection rates, which improved sharply in the second quarter to an average 95 percent, may also wane as per the rating agency.
“This trend is aided by the pickup in economic activity since lockdowns in the country ended and, in many cases, by the savings of the borrowers. Given that overall economic activity levels remain soft, savings could deplete fast, potentially hurting future collections,” it said in its report.
Banks and nonbank financial companies (NBFCs) have also been strengthening their balance sheets and bolstering their equity bases. These reserves and excess COVID provisions might help them smooth the hit from COVID-related losses, S&P said.
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