Not many takers for loan restructuring?

Mumbai: With the loan restructuring window coming to a close, analysts are cutting the estimates on loan recast by banks to 2.5-4.5% of their total advances from the previously projected 6-8%.

Analysts are also forecasting lower credit provisions and better profitability for banks in the next fiscal year starting April 1, on the back of improved asset quality with a quick economic turnaround.

Owing to an ongoing case in the Supreme Court over loan moratorium, loan restructuring requests have been much lower than previously estimated. A sharper-than-expected improvement in economic activities as well as liquidity support through the emergency credit line guarantee scheme have also helped.

Ratings firm ICRA has cut its loan restructuring estimate to 2.5-4.5% of total advances as against 5-8% estimated earlier.

The gross and net non-performing assets of banks are likely to rise in the near term to 10.1-10.6% and 3.1-3.2%, respectively, by March 2021 from 7.9% and 2.2% as of September 2020, resulting in also elevated credit provisions during the second half of the ongoing fiscal 2021. However net NPAs and credit provisions will subsequently trend lower in FY2022.

Anil Gupta, sector head – financial sector ratings at ICRA Ratings, projects the net NPAs declining to 2.4-2.6% by March 2022, citing expectations of sustained collections and lower restructuring. This will lead to lower credit provisions and better profitability in FY2022, he said. “We also expect public banks to break even and report better return on equity of up to 5% in FY2022,” he said, adding that private banks could see RoE improving to as much as 9.5-10.5%.

Improved asset quality and lower credit provisions could rejuvenate the lending decisions of banks, analysts said.

Low interest rates, improved business volumes, along with better job prospects and income levels could also stimulate credit demand next year.

ICICI Securities expects a cumulative slippage run-rate of 4-7% over FY21 and FY22. This could be 10-30% higher than the last three years’ average. It has also brought down the credit cost estimate to 3-6% for the two fiscal years.

“We expect banks to structurally shave off costs by 20-30 bps (basis points) of assets. On this basis, we increase earnings by 2-5% for FY21 and 5-30% for FY22,” the brokerage house said a note.

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