Provisioning cover for non-performing assets (NPAs) in the banking system is expected to touch 60% (net of technical write-offs) by the end of fiscal 2019, compared with 50% last fiscal. Consequently, overall profitability would remain subdued, though better than last fiscal.
Public sector banks (PSBs) will bear the brunt of additional provisioning and most of them will report losses for the third straight year. Private banks would, however, report profits and help lift overall banking system profit back into positive territory.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings, “Provisioning costs will remain elevated at over Rs 2.8 lakh crore this fiscal despite our expectation that fresh slippages to NPAs will reduce progressively. The high provisioning will be due to ageing of NPAs and high level of haircuts on many of the NPAs referred to National Company Law Tribunal (NCLT) for resolution, specifically for NCLT 21 and subsequently referred accounts.”
While most banks have made adequate provisions for NCLT 1 accounts, it is expected that provisioning levels will need to be higher in many other large NPA accounts.
Stressed assets in the power sector, for one, are expected to see haircuts in excess of the current provisioning levels. Power sector loans account for ~25% of the 100 largest NPAs in the banking system where provisioning for a number of stressed accounts is lower than the banking system average of ~50%.
Of the total NPA provisioning for this fiscal, nearly 80% will be borne by PSBs given the sharp surge in NPAs witnessed in the past couple of years and their relatively higher share of NPAs compared with private banks. Gross NPAs for PSBs at the end of last fiscal was ~14.7% compared with ~4.7% for private banks.
As a result of the high provisioning requirements, many PSBs will continue to report losses for the third consecutive year, though the extent of this will be lesser at ~Rs 50,000 crore compared with ~Rs 85,000 crore last fiscal.
However, once provisioning levels touch 60%, banks will be reasonably cushioned against future challenges in resolution of outstanding NPAs.
Despite our expectations of continued losses for PSBs, profitability of banking system is expected to start improving from the second half of this fiscal and turn positive for the whole fiscal as most large private banks are expected to report profits.
Says Rama Patel, Director, CRISIL Ratings, “Return on assets (RoA) for the banking system is expected to improve to around 0.1% for fiscal 2019 as against -0.22% last fiscal. Increase in credit growth, mainly in the better-yielding retail loans segment, and lower interest reversal on NPAs due to reduced slippages will mean improvement in net interest margins (NIMs) and will support pre-provision profits for the banking system.”
Even after adjusting for an increase in the cost of deposits in a rising interest rate environment, NIMs for the banking system are expected to improve by 5-10 basis points this fiscal from 2.5% in the previous fiscal. Pre-provision profits will remain steady at ~2% this fiscal.
1 NCLT-1 refers to the twelve large NPA accounts first referred for resolution to NCLT under the Insolvency and Bankruptcy Code (IBC) in fiscal 2018 while NCLT-2 refers to the next 28 large NPA accounts thus referred.