The rating agency, CRISIL in its latest report has said that Indian banks may need to set aside as much as Rs 3.3 lakh crore as provisioning, mainly for large corporate non-performing assets (NPAs) in the financial year 2018. It observed that the economic value of assets underlying NPAs is eroding with time, and resolutions are hard to come by, therefore, banks would need to do well to bite the bullet and step up on provisioning. It also believes that this will facilitate faster clean-up of their balance sheets.
The rating agency has said that it arrived at the Rs 3.3-lakh-crore number after an account-by-account analysis of the economic value of assets underlying large corporate bad loans. It also showed that potential write-downs could be in the 25% to 75% range. Further, it pointed out that while some of the NPA accounts have been adequately provided for, the majority of them will require higher provisioning compared with current levels, based on the residual economic value of the assets. The report also estimated that this could lead to a net loss of nearly Rs 60,000 crore for the banking sector this fiscal with public sector banks (PSBs) bearing the brunt of the increase in provisions and the resultant impact on profitability because of their higher stock of NPAs.
Adding further, the report has noted that operating profits of banks, calculated before making loan and tax provisions, is likely to stabilise by the end of this fiscal, largely due to improvement in the net interest income. It also expects that pressure on the earnings profiles of banks would reduce from next fiscal if banks increase provisioning on large corporate NPAs this fiscal. It added that stabilization in operating profitability and mitigation of asset quality stress would then set the stage for earnings revival, especially of PSBs, as they focus more on credit growth.