Gross NPAs of banks likely to decline in FY21 amid MSME schemes, restructuring, write-offs: CARE Ratings

The year-on-year gross bank credit growth to MSEs in March had declined to its lowest level, amid the second Covid wave, since May in the financial year 2020-21.

Gross non-performing assets of banks are likely to decline in FY21 due to restructuring, write-offs, and resilience in the economy, rating agency CARE Ratings said on Wednesday. The decline is expected as several regulatory and government support schemes for MSMEs and others had helped borrowers to access liquidity and conserve cash flows. For instance, the moratorium on loan repayments for six months till August 30, 2020, Covid-related restructuring scheme for MSMEs till March 31, 2021, and for large corporates till December 31, 2020, Resolution Framework 2.0 scheme for personal loans and MSMEs till September 30, 2021, ECLGS to enable banks and NBFCs provide funding to MSMEs, TLTROs, special refinance facilities to NABARD/SIDBI/NHB to address sectoral credit needs, and extended partial guarantee scheme, the agency noted.

“The government had enabled loan of up to 20 per cent of an MSME’s total outstanding credit in the Rs 3 lakh crore ECLGS scheme. So, loans were guaranteed by the government and MSMEs got significant breathing space with immediate cash flows being taken care of so that they may not default and deteriorate their credit score, etc. Given that MSMEs generally have a significant share of NPAs, now that share will be much more muted than what we would have expected otherwise,” Sanjay Agarwal, Senior Director, CARE Ratings told Financial Express Online.

Gross NPAs had jumped by 43.7 per cent from Rs 7.1 lakh crore in March 2017 to reach Rs 10.2 lakh crore by the end of March 2018 following which the NPAs witnessed moderation and reached Rs 8.9 lakh crore by end of March 2020, the report said. The asset quality pressure witnessed by the banks over post asset quality review (AQR) had been reducing in a couple of years prior to Covid. The movement in gross NPA had declined to Rs 9 lakh crore in FY19 and to Rs 8.9 lakh crore in FY20.

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Despite a challenging year (FY21), the quantum of gross NPAs of scheduled commercial banks (SCBs) is expected to decline by the end of March 2021 as compared with the previous year due to write-offs, lower slippage, restructuring schemes, and ECLGS support for MSMEs, the agency said in the report. However, as anticipated with the Supreme Court judgment allowing for the recognition of NPAs, FY21-end numbers are expected to be either similar or slightly above the Q3 FY21 numbers, it added. “Slippages are largely from MSMEs in retail. MSME slippages have been reduced because of the ECLGS,” added Agarwal.

The FY21 gross NPAs is estimated to settle at Rs 7.9 lakh crore, according to CARE Ratings. While public lenders’ gross NPA amount is expected to be around Rs 6.0 lakh crore at the end of March 2021 vis-à-vis Rs 6.8 lakh crore at the end of March 2020, for private lenders, the gross NPA amount increased from Rs 1.8 lakh crore in March 2018 to over Rs 2 lakh crore in December 2019. However, it is subsequently expected to have retreated to around Rs 1.96 lakh crore by the end of March 2021.

Moreover, write-offs’ share in gross NPAs has markedly increased post FY18, indicating that SCBs have cleaned their books taking a hit and recoveries have had a smaller share of the same, the agency said. “MSMEs right off every quarter by all banks has been very significant because the government had given quite a lot of equity and banks had made a lot of provisions. Now they have written off against the provisions. So it doesn’t reflect in the profit and loss statement but writes-offs are very significant,” said Agarwal.

Importantly, the year-on-year gross bank credit growth to MSEs in March had declined to its lowest level, amid the second Covid wave, since May in the financial year 2020-21. The credit outstanding as of March 26, 2021, was Rs 11.07 lakh crore – up only 2.5 per cent from Rs 10.8 lakh crore in March 2020, according to the RBI’s monthly bulletin. Moreover, the share of MSEs in India’s overall gross bank credit also continued to decline for the third straight month. From 12.11 per cent in December 2020, the MSE share contracted to 12.09 per cent in January 2021 and 11.8 per cent in February before slipping further to 11.3 per cent in March. The overall gross bank credit as of March 26, 2021, stood at Rs 97.2 lakh crore.