The Indian Banking Sector facing a large overhang when it comes to stressed advances is not something new. The deteriorating asset quality of Indian banks, especially Public Sector Banks (PSBs), can be traced from the financial year (FY) 2016 to FY 2011. As per CARE ratings research, this was the period of rapid credit expansion when bank credit grew at an average rate of over 20 per cent.

“Factors that contributed to the deterioration in asset quality, include weak credit appraisal, post-sanction monitoring standards, project delays, and absence of a strong bankruptcy regime until FY 2017,” says CARE Ratings in its research report: Analysis of Movement in Stressed Advances.

Indian banks continued to witness asset quality pressure over the last five years, added the report. This led the government to implement a 4-R strategy that includes recognition of Non-performing assets (NPAs), resolution & recovery, and recapitalisation of PSBs and reforms.

Although these measures enabled recoveries and some improvement, bank NPAs still continued to dominate the headlines despite the government and Reserve Bank of India's (RBI) efforts to resolve the issue by infusing the necessary capital in PSBs.

Further in the last two years, although NPA levels have reduced on the back of loan write-offs, still the challenge for banks continues in the current year due to pandemics and lockdown which led to muted economic activities across the country. Despite several attempts in the past few years to resolve stressed assets, the progress has been minimal.

Around 67 per cent of the total customers of PSBs and 50 per cent of the total customers of private banks had availed of the loan moratorium as of April 30, 2020. However, this reversed in August 2020, as private bank customers accounted for a larger share (i.e., around 55 per cent).

“At the system level, the percentage of the amount under loan moratorium has improved from 50.1 per cent in April 2020 to 40.4 per cent in August 2020,” says CARE Ratings. The asset quality of banks is expected to witness pressure in the medium term, as the complete picture of the moratorium, the pause on asset classification and restructuring allowed is yet to show the results.

Going forward, the credit growth for the current financial year is anticipated to be muted and remain in the single digits, as the slippage ratio is expected to remain elevated in the medium term on the back of lower slippages due to moratorium and supreme court stay on NPA classification.