Risk of a sharp deterioration in the asset good quality of 5 of the biggest PSU banks now appears to be abating with the financial recovery choosing up pace, stated Moody’s Investors Service in a current note. However, in spite of this, the rating agency cautioned that such public sector lenders are probably to stay starved of enough capital to absorb unexpected shocks and help credit development. Banks had been anticipated to see a sharp rise in NPAs final year when the pandemic slowed the Indian economy down but in spite of the financial slump, the asset good quality of banks has observed mild improvement.
Risks minimizing for banks
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State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India, have all reported an improvement in their asset good quality in the initial nine months of the present fiscal year. “The gross NPL ratios of the five banks declined by an average of around 100 basis point as of the end of 2020 from a year earlier,” Moody’s stated. The estimates even account for loans that have not however been declared NPAs owing to the Supreme Court order. Lenders are also drawing comfort from the provisions produced by them against the anticipated jump in NPAs.
During the pandemic, many measures had been undertaken to help borrowers. This, according to Moody’s has largely helped restricted effect of the pandemic on the banks’ asset good quality. These measures integrated loan repayment moratorium, loan restructuring, monetary easing, liquidity infusion, Capital infusion into public sector banks, lowering LCR, amongst other folks. “As of the end of December 2020, the five banks restructured 0.7%-2.6% of gross loans, less than our expectations, as the impact of the pandemic on borrowers was not as severe as we had anticipated,” the report stated.
Dearth of capital to outcome in uneven recovery
Despite the green shoots, capital shortage remains a threat. “The banks will continue to face shortages of capital to both absorb any unexpected stress and support credit growth, with high credit costs continuing to suppress profitability,” they added. This shortage in the capital could outcome in an uneven recovery for the Indian economy with many vulnerable industries facing a setback. The banks’ asset good quality can also deteriorate more than anticipated, with exposures to the MSMEs, in specific, posing dangers, Moody’s stated.
The government planned to infuse Rs 20,000 crore into public sector banks this fiscal year and an additional Rs 20,000 in the next monetary year. While the capital infusions will support the banks meet Basel capital specifications, it will not enhance credit development, according to the report. This would outcome in some banks turning to the marketplace. Canara Bank and PNB have currently raised some capital from equity markets.
On the other hand, in an earlier note, Moody’s stated that private sector banks have raised enough capital buffers to tide by way of any hiccups going forward. Asset good quality of private lenders remains supported by the identical measures that have aided their public sector peers.