MUMBAI: The threat of a third wave of COVID-19 poses high risks to the quality of banks’ assets, especially the restructured loan portfolio, according to a report by the national rating agency ICRA. In addition to bad debts, lenders are likely to face challenges on the profitability and credit fronts due to the disruption caused by the Omicron variant of the coronavirus, the agency said.
He also sees a 15 to 20 basis point increase in borrower restructuring requests. The agency’s vice president (financial sector notes) Anil Gupta said: “With the increased spread of the new COVID-19 variant, i.e. Omicron, there is a strong possibility that a third wave is occurring. “
He added that a third wave poses a high risk to the performance of borrowers who have been affected by the previous waves and therefore poses a risk to the trend of improving asset quality, profitability and creditworthiness. .
Gupta also said banks have restructured most loans with a moratorium of up to 12 months. “Therefore, the restructured book is expected to start coming out of the moratorium from the fourth quarter of fiscal 2022 and the first quarter of fiscal 2023,†he said. During the two waves of the pandemic, the Reserve Bank of India (RBI) announced the 1.0 and 2.0 resolution framework to provide relief to borrowers and banks.
With the gradual restructuring under the COVID 2.0 program, the overall standard restructured loan portfolio for banks has grown to 2.9 percent of standard advances as of September 30, 2021 (two percent as of June 30, 2021), according to the report.
Most of these restructurings concern borrowers impacted by COVID 1.0 and 2.0. The agency said restructuring under the Covid 1.0 program is estimated at 34% (or Rs 1 lakh crore) of the total standard restructured loan portfolio of Rs 2.85 lakh crore for banks as of September 30, 2021.
And, under COVID 2.0, it is estimated at 42% or Rs 1.2 lakh crore. The balance included micro, small and medium enterprises (MSMEs) and other restructurings, he said.
The report adds that banks implemented around 83% of the total requests received under COVID 2.0, leading to an overall restructuring of Rs 1.2 lakh crore in loans until September 30, 2021. “As requests restructuring can be implemented until December 31. 2021 (as part of the COVID 2.0 agenda), the incremental restructuring could increase by 15 to 20 basis points from current levels, â€the agency said.
Gupta added that the third wave could revive demand for restructuring loans, including those that were already restructured. “In such a case, the visibility on the performance of the restructured loan portfolio, which was previously expected for fiscal year 2023, can now be expected for fiscal year 2024, as the moratorium on existing restructured loans could be extended”, did he declare.
According to ICRA estimates, 60 percent of the total restructuring of Rs 1 lakh crore under Covid 1.0 was represented by business and the balance (or Rs 0.4 lakh crore) by retail and of MSMEs. “Therefore, the restructuring under COVID 2.0, which was available to retail borrowers and MSMEs, was 3 times the restructuring under COVID 1.0,†he said.
The report states that the restructuring also led to the upgrade of accounts, which would have slipped earlier. This, coupled with the strong recovery of Dewan Housing Finance Ltd (DHFL) in the second quarter of fiscal 2022, has led to the highest recoveries and upgrades for banks in the past three years.
As a result, despite the high gross slippage rate of 3.2 percent in the second quarter of fiscal 2022 (3.5 percent in the first half of fiscal 2022 and 2.7 percent in fiscal 2021), gross and net non-performing advances (NPAs) remained on a downward trend, he mentioned.
Comments are closed.