Moody’s sees 50% hike in NPAs of public sector banks in next two years

Rating agency Moody’s has said that newly formed non-performing loans (NPL) of state-owned banks will go up by nearly 50% to about 1.5% of gross loans in the next two years, but it is not a cause of worry as lenders are well placed to absorb the loan impairments.

Retail, SME loans

The second wave of coronavirus is causing problems in loans, particularly in SME and retail credit. Lockdowns hit hard the savings and earnings of self-employed individuals and SMEs, Moody’s Investors Service said.

Their income had taken a hit due to economic disruptions during the first wave and there was an additional burden of medical expenses associated with Covid-19, Moody’s Investor Services said, adding that the support from the government measures to households and businesses was limited too”

As a result, non-performing loans formed more quickly than in the first wave, with loans to self-employed individuals including auto loans, microfinance, and unsecured loans along with SME loans, it added.

Good credit strength

In a report, Moody’s said lenders’ improved profitability, capital and loss buffers will help maintain credit strength. The anticipated recovery in the economy and government support is also expected to help avoid a steep increase in non-performing assets.

Alka Anbarasu, vice president and senior credit officer at Moody’s, said initiatives such as the emergency credit-linked guarantee scheme (ECLGS) are effective in giving immediate liquidity for businesses.

The average NPL ratio will remain more or less stable, driven by the growth in credit.

The prevailing situation is unlikely to derail improvements in banks’ balance sheets, it said.

The Reserve Bank of India’s accommodative interest rates and loan restructuring schemes are also acting as factors to mitigate asset risks

Moody’s-rated banks have stronger loss-absorbing buffers, the rating agency added.