Explained: Why India’s banks will face major NPA challenge in 2021

The coronavirus pandemic has had a devastating impact on banks and financial institutions round the world because the global depression has led to an increase in defaults and bad loans. things is especially serious for Indian banks that are already struggling to deal with rising bad loans.

For banks in India, tackling the ballooning non-performing assets (NPA) are going to be the most important challenge in 2021 as loan defaults need to spiked sharply in Covid-hit 2020. Many small and medium-scale companies are still struggling to repay dues owed to banks.

NPAs may erupt by 2022
A large number of people also are struggling to repay their loans after losing income or employment thanks to the historic depression triggered by the coronavirus pandemic and therefore the initial lockdown.

While banks are reporting a decline in NPAs within the previous couple of months, there’s a high possibility that forbearance on asset classification is masking bad loans that are constantly on the increase consistent with S&P Global Ratings.

The rating agency fears that financials institutions in India will find it difficult in maintaining the momentum after the quantity of latest non-performing loans declined within the half to September 30. It also expects the Indian banking sector’s bad loans to increase to 10-11 per cent of the entire loans as on March 31, 22 from eight per cent on June 30, 2020.

In addition, an earlier FSR report released by RBI in July indicated that gross NPAs of all banks may jump to 12.5 per cent by the top of the fiscal under the baseline scenario from 8.5 per cent in March 2020.

The global rating agency also mentioned in its report that performance of Indian banks exceeded expectations within the second quarter, but added that much of it had been thanks to the six-month loan moratorium and therefore the Supreme Court’s decision barring banks from classifying loans as NPAs.

It said banks could have seen their NPAs rise by 10-60 basis points if it had not been for the highest court’s ruling. the highest court had allowed banks to take care of loan accounts as standard whilst borrowers defaulted.

Thousands of crores worth of loans have gone sour thanks to non-payment by borrowers and therefore the amount of NPAs is probably going to extend further. and therefore the global rating agency isn’t too optimistic about the loan restructuring plan.

“We estimate that quite half our estimated restructured book may eventually slip into NPLs, resulting in elevated NPL and credit cost levels in subsequent fiscal years,” S&P Global Ratings said in its report.

While there are other problems like low corporate loan growth, the NPA problem seems to be the most important “hidden” issue which will erupt by 2022 when relaxations like loan restructuring come to an end. But at the instant the govt and banks within the country are confident that there are enough provisions to soak up any forthcoming shock.

Heidi Phillips