Asset Quality Of Banks, Non-Banking Lenders Can Deteriorate Further: Rating Agency ICRA

A further deterioration in asset quality and the risks for banks and non-banking finance companies (NBFCs ) continue to remain high despite most of them reporting a decline in the loans under moratorium phase two (June to August 2020), rating agency ICRA said on Wednesday. This is due to the fact that the last 10 to 15 per cent of borrowers who continue to opt for the moratorium will be more vulnerable to slippages.

"Although the gradual relaxations in restrictions imposed during the lockdown have helped in improving the collection efficiencies and thereby reduction in residual assets under the moratorium, the pace of recovery seems lower than expected because of localised re-imposition of lockdowns by various states over the last two months."

ICRA said the GDP forecast for current fiscal has already been revised to a contraction of 9.5 per cent vis-a-vis an earlier estimate of 5 per cent.

"A higher share of loans under moratorium for a prolonged period or loans restructured by a lender will reflect incipient stress in the asset quality and will be credit negative for the lenders unless such losses are sufficiently offset by timely capital raise," said Anil Gupta, Vice President and Sector Head Financial Sector Ratings at ICRA.

"In our view, as the lenders may continue to have discretion on extending the moratorium, a one-time sector-specific restructuring may also create implementation challenges, given the inter-linkages with various sections of the economy," he said.

As per ICRA estimates, the median loans under moratorium will be 25 to 30 per cent compared to broadband of 10 to 50 per cent of total loan books with many of the borrowers being common under phase one and two.

In general, the moratorium levels across banks are lower than those of NBFCs with private banks having even relatively lower levels.

ICRA said if a one-time restructuring window is made available, more borrowers may opt for it to ease out the near-term uncertainties, conserve liquidity and to smoothen their cash flow as the economy takes the turn for revival.

If the Reserve Bank of India was to consider one-time restructuring, it is expected to be extended to certain sectors which will take longer to recover, it said.