NPAs expected to increase in first half of 2021; 37% respondents expect NPA levels to be upwards of 12%

New Delhi: The twelfth round of the FICCI-IBA Survey was carried out for the period July to December 2020. A total of 20 banks including public sector, private sector and foreign banks participated in the survey. These banks together represent about 59% of the banking industry, as classified by asset size.

According to the survey, almost a year into the pandemic, economic recovery has started to gain momentum. High-frequency indicators show demand is holding up. The bank credit is also seeing improvement, as indicated by RBI’s statistics.

The survey findings also show that long term credit demand has been growing for sectors such as Infrastructure, Pharmaceuticals and Food Processing. Particularly for the pharma sector, 45% of the respondents have indicated an increase in long term loans in the current round of survey as against 29% in the previous round. Better sectoral growth prospects have helped the credit uptake in these sectors. Infrastructure and Pharmaceuticals are expected to see an increase in long term credit even in the first half of 2021, as reported by 68% and 58% of respondents, respectively. Other sectors expected to see rise in long term credit include Metals, Iron & steel, Automobiles, Real estate and NBFCs.

The survey further states that the number of banks reporting tightening of credit standards during second half of 2020 has come down. 47% of respondent banks reported tightening of credit standards for large enterprises as against 68% in the last round. Likewise, percentage of banks reporting tightening of credit standards for SMEs has come down to 21% from 44% in the last round. In-fact, there has been a significant increase in respondents that have eased credit standards for SMEs, from 28% in previous round to 53% in current round. The reasons cited for easing of credit standards are expectations of better growth going forward, reduction in their cost of funds and the need for providing Covid-19 relief to borrower. The credit standards are likely to remain unchanged in the first half of 2021, as reported by a large majority of respondent bankers.

An uptick in CASA deposits has been reported by 70% of respondent banks in the current round of survey, similar to that reported in the previous two rounds. The reasons cited for increase in share of CASA deposits include focused approach of many banks towards increasing CASA accounts, especially to mobilise low-cost deposits. Moreover, the differential between SB interest rate and term deposit rate has come down substantially, thereby lowering the share of term deposits in total deposits. In the current scenario of uncertainty due to pandemic, the customers too have preferred to have more liquid savings.

Participating bankers in the survey were also asked to share insights on the sectoral deployment of funds availed under on-tap targeted long-term repo operations (TLTRO) scheme, which was announced by the RBI to provide more liquidity in the system. Over half of the respondents indicated not having availed funds under TLTRO while about 33% indicated that TLTRO funds were deployed completely in securities issued by NBFCs/ MFIs.

RBI in its second bi-monthly policy meeting on Aug 6, 2020 had also extended the provision of one-time restructuring scheme for MSMEs, keeping in view the need to provide COVID-19 relief. The current round of survey reveals that there has been a significant increase in the request for restructuring of advances. An overwhelming 85% of the respondent banks have cited an increase in requests for restructuring of advances as against 39% in the last round.

The NPA levels for second half of 2020 have seen an improvement, with 50% of respondent banks reporting a decline in NPAs during current round of survey. Bank wise analysis reveals that major improvement in NPAs has come from the PSBs. About 78% of participating Public sector banks have cited a reduction in NPA levels. This can be attributed to an improvement in asset quality, especially with improved recoveries and higher write-offs by several banks. Moreover, due to Covid-19 pandemic, the Supreme Court had ordered all banks not to classify Covid-19 related defaults as NPAs. Amongst the sectors that continue to show high level of NPAs, most of the participating bankers identified sectors such as Infrastructure, Metals, iron & steel, Real Estate and Engineering Goods.

However, in terms of outlook, nearly 68% of respondent bankers expect the NPA levels to be above 10% in first half of 2021. 37% of respondents in-fact expect NPA levels to be upwards of 12%. In the RBI Financial Stability Report, which was released in January 2021, under stress test under baseline scenario, GNPA could go up to 13.5 per cent by September 2021.

Some of the high NPA risk sectors identified by majority of respondent bankers in current round of survey include Tourism and hospitality, MSME, Aviation and Restaurants. 55% of respondents believe NPAs to rise substantially in tourism and hospitality sector, while another 45% reported that NPAs are likely to increase moderately in this sector. Another high NPA risk sector reported in current round of survey is the MSME sector, with 84% respondents expecting an increase in NPAs in this sector. Almost 89% respondents also expect Restaurants to see an increase in NPAs, though only 26% expect NPAs to increase substantially in this segment.

Banks were asked to suggest key measures for faster return to normalisation and acceleration of growth thereafter. The recommendations included direct cash transfers to economically weaker sections in rural India, rationalizing personal income tax rates, raising the minimum wages of the low-income workers. Bankers also suggested increased focus on enhancing indigenous manufacturing capacity, extending PLI scheme to the Manufacturing, Service and Export sectors, reducing the number of GST rate slabs and rationalizing of rates. Amongst the banking related measures, the surveyed respondents had asked for recapitalisation of banks which has also been announced in the Union Budget. Other suggestions included extension of ECLGS scheme till Q1 FY22 and relaxing the NPA classification norms to 180 days.

Bankers were also asked to share their views on various avenues that government should consider for raising additional resources, considering higher fiscal expenditure in wake of covid-19 crisis. Some of the suggestions like accelerating disinvestments and monetising of government owned assets were announced in the Union Budget. Other suggestions by the bankers include introduction of tax-free ‘Covid bonds’, monetization of enemy property assets, and gold disclosure scheme, among others.