Gross NPAs to mount in FY22

That was bound to happen as the lag effect of the pandemic and the effect of COVID 2.0. RBI expects gross NPAs of Indian banks to spike from 7.48% to a level of 9.8% in FY22, with a worst-case scenario of 11.22%. That would almost neutralize the big recovery efforts of the last few years and virtually put India back where it was in 2018. That remains the big risk for banks with the PSBs a lot more vulnerable. Even private banks and NBFCs are going to bear the cross. 

Credit/deposit ratio riddle

The good news is that the deposits have grown at over 11% with bulk of this growth coming from low-cost CASA. The concern is that credit growth is just about 5.4% meaning that the credit to deposit ratio is at a multi-year low. That is not great news at a time when the credit growth needs to pick up to really fire up the growth in the economy, and especially the manufacturing sector. It is hoped that once the credit picks up in line with an economic recovery, the ratio will improve. However, this is a major shortfall in the macro data, since credit growth is the big missing link. 

Financials have improved

Perhaps, the biggest piece of good news on the health of the banks is income statement numbers of the banks. For example, banks saw ROE expand from 4% to 7.7% on a yoy basis. Similarly, the ROA also expanded from 0.4% to 0.7% overall. There have been some significant improvement in the cost of funds of the banks. For example, the cost of funds over the year has fallen from 5.6% to 4.7%. However, during this period, the yield on assets also fell from 8.3% to 7.6%. As a result, the overall impact on the net interest margins was a marginal improvement of 20 bps from 3.1% to 3.3%. However, the efficiency of capital use appears to be one area where banks have done very well in the last couple of years. 

Moratorium saved the day

Contrary to popular perception, the RBI FSR has underlined that there would have been a total credit debacle in the absence of moratorium and restructured loans. However, the restructured loans as a percentage of advances were just about 0.9% and this restructuring was predominantly done by the MSMEs, for obvious reasons. RBI has admitted that despite the risk, created by restructuring of loans, the overall impact was positive as in the absence of it, there would have been a spate of defaults. Overall, the tone appears to be that COVID risk appears to be largely under control!