Rating agency Icra on Thursday said that the three-month moratorium on repayments provided by the Reserve Bank of India (RBI) would postpone recognition of asset quality stress by 1-2 quarters. The agency said lenders with higher share of asset classes such as microfinance, commercial vehicles and MSMEs will be more vulnerable, while those with exposure towards asset classes like gold loans and salaried housing will be impacted less.
“Even in a scenario where the banks and non-banks are able to absorb such an increase in credit provisions through their P&Ls and prevent the capital erosion, the level of stressed assets in relation to the core equity is expected to increase, thereby weakening their solvency profile,” said Karthik Srinivasan, group head, financial sector ratings, Icra. The rating agency expected the GDP growth to slow down to 2% during FY21, with the growth in Q1FY21 coming in at -4.5%.
Following the recent cut in policy rates by the RBI and small savings rates by the government, Icra said banks are expected to cut their one-year deposit rates by about 50-70 basis points (bps) during FY21. Some private banks and NBFCs will continue to face elevated funding costs amid higher risk aversion from the investors, it noted.
For the NBFCs, high reliance on debt market borrowings may pose challenges as a moratorium may not be available on these borrowings. The ability to have diversified funding sources, including access to debt capital markets, will remain as a key differentiator for non-banks, Icra said.
“Amid funding challenges, higher on-balance sheet liquidity and uncertainty on asset quality, private lenders are likely to remain cautious on fresh disbursements, whereas the public sector lenders may be constrained by their capital position and merger-induced bottlenecks.” Icra said, adding that with low credit growth, likely rise in credit costs and excess liquidity, the profitability of financial entities to be adversely affected by 50-90 bps during FY21.