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Banks to see sharp fall in bad loans, but exposures to small businesses a worry: Crisil

Mumbai, Sep 22, 2022

Synopsis

The large corporate segment will witness the biggest improvement with the gross NPAs set to fall below 2 per cent next fiscal from a peak of 16 per cent as on March 31, 2018, the agency said.

Banking system's Gross Non-Performing Assets (GNPA) will decline by 0.90 per cent to 5 per cent by the end of the current fiscal on a significant improvement in the large corporate exposures, a report said on Wednesday. The GNPAs will improve further in FY24 to a decadal low of 4 per cent, the report by Crisil Ratings said.

However, it said that all is not well on the dud asset front, and the banking system's exposure to the Micro, Small and Medium Enterprises (MSME) sector is a worry.

Gross NPA in the MSME segment, which suffered the most during Covid pandemic, may rise to 10-11 per cent by March 2024 from 9.3 per cent as on March 31, 2022, the agency said.

"While relief measures did help contain asset quality deterioration last fiscal, the segment saw the most restructuring at 6 percent compared with 2 percent for the overall banking sector. About a fourth of these accounts could potentially slip into NPAs," it explained.

Unlike MSMEs, large corporates have been doing well as a borrower segment, it said.

The large corporate segment will witness the biggest improvement with the gross NPAs set to fall below 2 per cent next fiscal from a peak of 16 per cent as on March 31, 2018, the agency said.

A study of large exposures of banks, constituting more than half of corporate advances, shows the share of high-safety exposures has increased to 77 per cent as on March 2022 from 59 per cent in March 2017, while exposure to sub-investment grade companies more than halved to 7 per cent versus 17 per cent, Crisil's deputy chief rating officer Krishnan Sitaraman said.

The agency said the 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 and added that this has also led to increased preference for borrowers with better credit profile.

It added that deleveraging and strengthening of India Inc balance sheets also helped.

With much of the stress in the corporate loan book already recognised and better quality of incremental lending, restructuring for this segment was low at 1 per cent, covering only a few corporate groups. Mechanisms such as the Insolvency and Bankruptcy Code have also supported recoveries and increased credit discipline among borrowers.

The asset quality of the banking sector will also benefit from the proposed sale of NPAs to the National Asset Reconstruction Company Ltd (NARCL), it added.

[The Economic Times]

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