Banks' credit costs to stay at 2-3% till FY20, says India Ratings

Mumbai: Banks will continue to see their credit costs (amount set aside for bad loans) stay at 2-3 per cent in FY19 and FY20 because of ageing toxic assets and accelerated provisioning. The slippages from the non-corporate loan book covering farming, small, micro and medium enterprises, and retail segments will also add to provisions, according to rating agency India Ratings and Research.

The need to provide for assets under new accounting standards (Ind-As), if implemented from FY20 onwards, has also decreased to about ~300 billion from ~870 billion. Banks have already incurred the substantial credit costs in FY18. Most of the impact is likely to be absorbed over the normal course of business in FY19, the rating agency said.

The non-performing assets (NPAs) in agriculture, small and medium-sized enterprises (SME) and personal/retail loan segments have increased significantly (in terms of percentage). Given that Reserve Bank of India (RBI) forbearance is available in some of these segments in terms of recognition, part of incremental credit costs on such accounts may be recognised in Q4FY19-FY20, it added.

The agency has meanwhile maintained a stable outlook on private sector banks for the remainder of FY19 because of robust capitalisation with high asset growth, and ability to gain market share profitably. The outlook on two large public sector banks (PSBs), State Bank of India (‘IND AAA’/Stable) and Bank of Baroda (‘IND AAA’/Stable) is also stable.

Since the report came out, the government has decided to merge Bank of Baroda, Vijaya Bank and Dena Bank to create the country’s third largest lender.

It retained a negative outlook on the remaining PSBs owing to their weak capitalisation and expected aging provisions on the large stock of non-performing loans.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.