India Ratings and Research (Ind-Ra) has said that the operating buffers (pre-provisioning operating profit - PPOP) of the top five private sector banks by advances size, constituting 25% of overall banking and 75% of private bank space, could decline by up to 15% yoy in FY21 (FY20: PPOP/average advances: 4.9%).
"This would decrease the ability of banks to withstand credit costs without capital erosion. This would be an outcome of (i) lower portfolio yields due to an increase in slippages, (ii) lower loan growth due to slow originations and limited enhancements, (iii) lower fee and other income as origination and transaction volumes ramp-up over FY21, (iv) slower pace of repricing for deposits in the marginal cost of lending rate (MCLR) regime than that for advances, (v) higher liquidity deployed in low earning government securities or under reverse repo," India ratings has said in a report.
Ind-Ra expects that the impact of the GDP destruction and slowdown on the economic activities on the banking sector in the aftermath of COVID-19 will not be benign. The sector was putting its house in order after the last six painful years on the corporate side. However, the challenges on the non-corporate side (retail, SME and agri) were already showing up (including in retail) as we entered into the pandemic. The pandemic is likely to aggravate that stress. Ind-Ra also expects that the percentage portfolio under moratorium for these private banks would have increased by May 2020.