CRISIL estimates stressed assets in the banking system to be around Rs 11.5 lakh crore, or ~14% of total advances, and does not expect this number to increase significantly over the medium term. That’s because of gradual recovery in the credit quality of corporates driven by higher commodity prices, lower interest rates, improved capital structures, and efficiency gains.
About two-thirds of the overall stressed assets in the banking system has already been recognised by banks as NPAs as on March 31, 2017.
The stressed assets include both reported gross non-performing assets (NPAs) and standard assets that are under pressure currently and could deteriorate into NPAs over the medium term.
The assets under pressure mostly comprise not-yet-recognised bad loans (recognised as NPA in one bank, but not in others), restructured standard accounts, and stressed assets structured under schemes such as SDR, 5:25 and S4A.
CRISIL expects gross NPAs in the banking system to be ~10.5% of advances as of March 2018, up from 9.5% as of March 2017. Faster resolution of stressed accounts through the Insolvency and Bankruptcy Code and various structuring schemes, therefore, is critical to improving the asset quality of banks.
The infrastructure, power, engineering, and construction sectors contribute bulk of the stressed assets in the banking system.
“With the majority of stressed assets now recognised as NPAs, the rest of the corporate loans portfolio of banks can be expected to perform better over the medium term. However, the performance of MSME and agriculture loans could see some deterioration mainly due to the impact of Goods and Services Tax (GST) and farm loan waivers, respectively. But these are unlikely to stress bank balance sheets the way large corporate NPAs did,” said Gurpreet Chhatwal, resident, CRISIL Ratings.
The MSME sector could face some asset quality challenges in the near term due to the impact of demonetisation and the need to conform business processes to the GST regime. But banks are better placed here because exposures are spread across industries and not as chunky as corporate loans.
Farm loan waivers by some states has led to a spurt in overall agriculture loan NPAs. While most of the increase should get corrected as banks receive payments from states, there would be some impact on credit discipline in the near term.
CRISIL expects fresh NPA creation to decelerate this fiscal, but the overall stock would continue to rise because slippages would still outpace recoveries.
“In the past couple of years, recoveries by banks have been poor and the bulk of the reduction in gross NPAs has been because of higher write-offs,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. “Sluggish economic growth, continued stress in some sectors, and slow place of resolution proceedings have been constraining recoveries.”