Indian banks have posted significant financial improvements in their working for the first three quarters of the financial year, which ends in March 2021 – the aggregate non-performing loan (NPL) ratio fell to 7.2% by end-December 2020 from 8.5% in March 2020. This created a stir amongst financial analysts who say that the focus has now shifted from impaired loans to growth as Asia’s third biggest economy is seen expanding at a mouth-watering 11% pace. India’s banks have seemingly bucked the trend among Asian emerging market banking systems regarding MPLS and credit costs but the system started from a position of relative weakness. The improved financial results have benefited from forbearance and haven’t yet fully reflected the impact of the pandemic. After all, notwithstanding the likely sharp economic rebound. Indian government’s support measures for bank borrowers have softened growth in nonperforming loans (NPLs), averting the risk of a sharp deterioration in asset quality.
Ample domestic liquidity, loose monetary policy, moratoriums on loan repayments and government-guaranteed loans to small businesses have supported Indian banks’ asset quality. As a result, restructured loans have not increased as much as expected at the onset of the pandemic. The operating environment remained challenging, particularly for state banks which must balance that recovery against the need to preserve what are generally modest loss absorption buffers. Demand for credit will rise as the economy recovers, but this is where the ability of the public and private sector banks to accelerate credit growth will likely diverge somewhat. For instance, for private banks, better poised to tap growth opportunities as they’ve raised fresh capital in recent times and their higher contingency reserves, offer better earnings and capital resilience than the state banks, throwing some numbers behind that. Average buffer between pre-provision profits and credit costs is only around 160 basis points for the state banks, which is just under half that of the private sector banks. So, the former will need to raise additional capital, which we see some of that likely coming from state infusions, just how much will be raised I guess only time will tell.