As the Omicron variant of Covid-19 cases spread in the country, a potential third wave of viral infection is posing risk to asset quality of banks, especially the restructured loan book, says credit rating agency ICRA.
“Banks restructured most of the loans (during the second wave of Covid-19) with a moratorium of up to 12 months. This book is likely to start exiting the moratorium from Q4 FY2022 and Q1 FY2023. Therefore, a third wave poses high risk to the performance of the borrowers that were impacted by the previous waves and hence poses a risk to the improving trend of asset quality, profitability, and solvency,” Anil Gupta, vice president – Financial Sector Ratings at ICRA Ratings, said.
According to ICRA, with incremental restructuring under Covid 2.0, the overall standard restructured loan book (mostly of borrowers impacted by Covid 1.0 and 2.0) for banks increased to 2.9% of standard advances as on September 30, 2021 (2.0% as on June 30, 2021). The restructuring under Covid 1.0 is estimated at 34% (or ₹1.0 lakh crore) of the total standard restructured loan book of ₹2.85 lakh crore for banks as on September 30, 2021, while restructuring under Covid 2.0 is estimated at 42% or ₹1.2 lakh crore. The balance comprised micro, small & medium enterprise (MSME) and other restructuring.
ICRA estimates that 60% of the total restructuring of ₹1.0 lakh crore under Covid 1.0 was accounted for by corporates and the balance (or ₹0.4 lakh crore) by the retail and MSME segments. Hence, the restructuring under Covid 2.0, which was available for retail and MSME borrowers, stood at 3x of the restructuring under Covid 1.0. “The absence of a moratorium on loan repayments, as announced by the Reserve Bank of India (RBI) during Covid 1.0, drove higher restructuring under Covid 2.0. Public sector banks (PSBs) were relatively more accommodative with the restructuring requests of borrowers as their restructured books stood at 3.2% of the standard advances vis-à-vis 2.2% for private sector banks (PVBs). The restructuring also led to the upgradation of accounts, which would have slipped earlier. This, coupled with the large recovery from Dewan Housing Finance Limited (DHFL) in Q2 FY2022, led to the highest recoveries and upgrades for banks during the last three years. As a result, despite the elevated gross slippage rate of 3.2% in Q2 FY2022 (3.5% in H1 FY2022 and 2.7% in FY2021), the gross and net non-performing advances (NPAs) remained on a declining trend,” ICRA says.
The agency also points out that the banks have implemented about 83% of the total requests (76% for PSBs and 86% for PVBs) received under Covid 2.0, leading to an overall restructuring of ₹1.2 lakh crore of loans till September 30, 2021. As the restructuring requests can be implemented till December 31, 2021, incremental restructuring could increase by 15-20 bps from the current levels, it says.
“The third wave could revive the demand for the restructuring of loans, including loans which were already restructured. In such a case, visibility on the performance of the restructured loan book, which was earlier expected in FY2023, may now be expected in FY2024 as the moratorium on the existing restructured loans could be extended,” adds Gupta.