Bank loan

Bank loan books, asset quality at risk due to Omicron, according to ICRA


As the Omicron variant of Covid-19 cases spreads across the country, a potential third wave of viral infection poses a risk to the quality of banks’ assets, especially the restructured loan portfolio, according to the rating agency ICRA.

“Banks have restructured most loans (during the second wave of Covid-19) with a moratorium of up to 12 months. This book is likely to start rolling out of the moratorium from the fourth quarter of fiscal 2022 and the first quarter of fiscal 2023. Therefore, a third wave poses a high risk to the performance of borrowers who have been affected by waves and therefore poses a risk to the trend of improving asset quality, profitability and creditworthiness, ”Anil Gupta, vice president – Financial Sector Ratings at ICRA Ratings, said.

According to the ICRA, with the incremental restructuring under Covid 2.0, the overall portfolio of standard restructured loans (mainly borrowers impacted by Covid 1.0 and 2.0) for banks increased to 2.9% of standard advances as of September 30, 2021 (2 , 0% as of June 30, 2021). Restructuring under Covid 1.0 is estimated at 34% (or 1.0 lakh crore) of the total standard restructured loan portfolio of ₹ 2.85 lakh crore for banks as of September 30, 2021, while restructuring under Covid 2.0 is estimated at 42% or ₹ 1.2 lakh crore. The balance included micro, small and medium enterprises (MSMEs) and other restructurings.

ICRA estimates that 60% of the total 1.0 crore lakh restructuring under Covid 1.0 was attributable to businesses and the remainder (or 0.4 lakh crore) to the retail and MSME segments. So the restructuring under Covid 2.0, which was available to retail borrowers and MSMEs, amounted to 3 times the restructuring under Covid 1.0. “The lack of a moratorium on loan repayments, as announced by the Reserve Bank of India (RBI) during Covid 1.0, has led to further restructuring under Covid 2.0. Public sector banks (PSBs) were relatively more accommodating with borrower restructuring requests as their restructured books amounted to 3.2% of standard advances compared to 2.2% for private sector banks (PVBs). The restructuring also led to the revaluation of the accounts, which would have slipped earlier. This, coupled with the strong recovery of Dewan Housing Finance Limited (DHFL) in the second quarter of fiscal 2022, has led to the highest recoveries and upgrades for banks in the past three years. As a result, despite the high gross slippage rate of 3.2% in the second quarter of fiscal 2022 (3.5% in the first half of fiscal 2022 and 2.7% in fiscal 2021), gross and net non-performing advances (APM) have remained on a downward trend, ”says ICRA.