HomeIndustryBad loans in banks to touch decadal low of 4% next fiscal,...

Bad loans in banks to touch decadal low of 4% next fiscal, says Crisil

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MUMBAI: Gross non-performing assets of banks– a key indicator of asset quality–is expected to improve 90 basis points (bps) year-on-year (y-o-y) to about 5% this fiscal, and another 100 bps to a decadal low of 4% by 31 March 2024, riding on post-pandemic economic recovery and higher credit growth, Crisil Ratings said on Wednesday.

The asset quality of the banking industry will also benefit from the proposed sale of bad loans to the National Asset Reconstruction Company Ltd (NARCL), it said.

Not all segments will perform equally well, the rating agency said, adding that the biggest improvement will be in the corporate segment, where gross non-performing assets (NPAs) are seen falling below 2% next fiscal from a peak of 16% as on 31 March 2018.

“The steady improvement in corporate asset quality is clearly reflected in leading indicators such as the credit quality of bank exposures. A Crisil Ratings study of large exposures of banks, constituting more than half of corporate advances, shows the share of high-safety exposures has increased to 77% in March 2022 from 59% in March 2017, while exposure to sub-investment grade companies more than halved to 7% versus 17%,” said Krishnan Sitaraman, senior director and deputy chief ratings officer, Crisil Ratings.

This asset quality improvement in the corporate segment follows a significant clean-up done of bank books in recent years, and strengthened risk management and underwriting. This has also led to increased preference for borrowers with better credit profiles, it said.

The deleveraging and strengthening of India Inc balance sheets also helped. This, the rating agency said, is reflected in its credit ratio (upgrades to downgrades), which touched 5.04 in the second half of last fiscal. The trend of upgrades comfortably outnumbering downgrades should continue over the medium term.

Subha Sri Narayanan, director, Crisil Ratings, said the agency expects slippages to trend 50 bps lower at 2% for fiscal 2024 versus 2.5% last fiscal, as the economy stabilizes.

“This should support asset quality metrics even as the pace of write-offs, which contributed almost 60% to the reduction in gross NPAs in the past three fiscals, and large-ticket resolutions decelerate. Our base-case estimate factors in part-sale of legacy corporate loan NPAs to the NARCL, which should snip reported gross NPAs by 50 bps,” said Narayanan.

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