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Banks' stressed assets in retail, MSME segments seen rising in FY22

The pandemic and the nationwide lockdowns hit MSMEs hard


The COVID-19 pandemic is expected to continue to have a bearing on the asset quality of banks in the current financial year. However, unlike previous years, where the bad loans were led by large corporate accounts, it is the micro, small and medium enterprises (MSME) and retail borrowers who have caused more impact this time around.

The pandemic and the nationwide lockdowns hit MSMEs hard as sales fell and global supply chains were disrupted. Many individuals too had to bear the brunt of salary cuts or even job losses. While the Reserve Bank of India did allow retail borrowers to restructure their loans, the non-performing assets are still likely to go up this year, according to CRISIL.

The credit ratings agency expects stressed assets in the retail segment to rise to 4-5 per cent in the current financial year ending March 2021, compared with 3 per cent in the previous year.

Similarly, stressed assets in the MSME segment are expected to rise to 17-18 per cent in 2021-22 from 14 per cent in 2020-21.

“The MSME segment, despite benefiting from ECLGS (Emergency Credit Line Guarantee Scheme) and the recent limit enhancement and tenure extension, is likely to see asset quality deteriorate and will require restructuring to manage cash-flow challenges. In fact, restructuring is expected to be the highest for this segment, at 4-5 per cent of the loan book,” CRISIL said.

The retail and MSME segments together form 40 per cent of bank credit, according to Krishnan Sitaraman, senior director and deputy chief ratings officer at CRISIL.

Corporate stressed assets though are likely to remain range bound in the 9-10 per cent range this financial year. In the asset quality review that had been initiated five years ago, a large part of the stress in the corporate loan book had already been recognised. Furthermore, many corporates had focused on deleveraging and strengthening their balance sheets in the last two-three years. This helped them tide over the pandemic relatively unscathed compared with retail and MSME borrowers.

Overall, gross non-performing assets of banks are seen rising to 8-9 per cent this fiscal, well below the peak of 11.2 per cent seen at the end of fiscal 2018, according to CRISIL.

“Restructuring under various schemes in the past focussed on larger exposures and primarily involved extension of maturity without any material haircuts, resulting in high subsequent slippages. This time, the entry barriers for restructuring are more stringent. Also, recent trends indicate that a reasonable proportion of borrowers, primarily on the retail side, have started making additional payments as their cash flows improve, despite having availed restructuring. MSMEs, however, may take longer to stabilise,” said Subha Sri Narayanan, director, CRISIL Ratings.

Its worth noting that CRISIL’s expectations are based on the base case scenario that India’s economy will grow 9.5 per cent this financial year. In case there is a third wave of COVID and demand were to decelerate, there could be downside risks to the estimates.

Separately, Moody’s also upgraded its outlook on India’s banking system on Tuesday to “stable” from “negative”. The deterioration of asset quality since the onset of the coronavirus pandemic had been moderate, and an improving operating environment will support asset quality, it said.

Moody’s expects India’s economy to continue on a recovery path. It sees India’s GDP growing 9.3 per cent this year and 7.9 per cent in the next year. 


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