Bank NPAs to climb to 9.9-10.2% in FY22 as COVID-19 impact surfaces

Although the banks of India reported a decline in bad loans in the December quarter, the impact of the pandemic-induced disruptions on asset quality will be spread over FY21 and FY22, with bad loans expected to rise to 9.9-10.2% by 31 March, 2022.

Banks had seen their gross and net non-performing assets improve in Q3. Despite including pro forma bad loans of about Rs. 1.3 trillion, gross NPA ratio stood at 8.3% compared with 8.6% as on March 31, 2020.

ICRA Limited believes that the decline seen till December was also driven by loan write-offs of Rs. 1.1 trillion during the first nine months of FY21. Also, based on the restructuring guidance given by various banks, the overall volume of recast debt is estimated at 1.3-1.5% of the advances, much lower than initial estimates.

Anil Gupta, Sector Head (Financial Sector Ratings) at ICRA, remarked that while the headline asset quality and restructuring numbers are encouraging, these do not reflect the underlying stress on asset quality of banks.

Gupta stated, “The level of loans in overdue categories has increased after upliftment of moratorium and the impact on asset quality will be spread over FY21 and FY22 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks.”