A recent report warns that due to poor loan offtake and the moratorium-driven contraction in net interest margins, five top private banks in India may see their non-performing assets (NPAs) ratio double to 5 percent in the current financial year 2020-21.
These five banks are HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank and IndusInd Bank as per a report by India Ratings released on Friday. The banks named also account for three-fourths of the private banking space and collectively control a quarter of the system.
"We forecast FY21 slippages to nearly double to around 5 percent for these banks from 2.3 percent in FY19 and 2.7 percent in FY20, even though net slippages would be lower if refinancing remains a challenge, resulting in a 4 percent contraction in their net interest margin," it said.
As loan demand remains tepid, banks are parking their excess liquidity in low yielding alternatives such as government bonds and top-rated corporate securities due to their higher credit risk perception and widening duration spreads, even as deposit inflows have been robust.
On the other hand, growth in deposits for these top five private banks in FY 2019-20 was 18.8 percent which was 18.5 percent in FY 2018-19, while loan growth declined to 15 percent from 19.1 percent during this period. Additionally, the Reserve Bank has injected Rs 1.7 lakh crore of liquidity into the system over the last six months through open market operations and secondary market purchases.
Without quantifying, the report expects a significant spike in delinquent assets due to the deep troubles the economy is facing due to the impact of the GDP destruction on the banking sector in the aftermath of COVID-19 pandemic.
Stating that the impact of the rising bad loans "will not be benign," the report notes that this comes at a time when the sector was putting its house in order after the last six painful years on the corporate side, even though retail, SME and agri loans were already showing up pain areas before the pandemic hit all of us.