The chief executives of banks were looking at 2022 as the year of corporate loan book growth. But the Omicron variant of coronavirus is threatening to destroy the economy further, after there were slow signs of recovery in the second half of the year just gone by. And it looks like the old demon of bad loans is going to keep haunting the banks.

ICRA has already started ringing the warning bells. In a new report, the rating agency has said that the threat of third wave of Covid-19 poses high risk to the asset quality of banks, especially their restructured loan books.

Banks are also likely to face challenges on profitability and solvency even as the rating agency has forecast a 15-20-basis point uptick in restructuring requests from the borrowers.

“As banks restructured most of these loans with a moratorium of up to 12 months, this book is likely to start exiting the moratorium from Q4 FY22 and Q1 FY23. A third wave, therefore, poses high risk to the performance of the borrowers that were impacted by the previous waves. Hence, it poses a risk to the improving trend of asset quality, profitability and solvency,” said ICRA vice president of financial sector ratings Anil Gupta.   

During the two waves of the pandemic, the Reserve Bank of India (RBI) announced Resolution Framework 1.0 and 2.0 to provide relief to the borrowers and banks.

With incremental restructuring under Covid 2.0, the overall standard restructured loan book for banks increased to 2.9% of standard advances as on September 30, 2021, (2% as on June 30, 2021), the report said.

Most of this restructuring includes borrowers impacted by Covid 1.0 and 2.0.

The agency said the restructuring under Covid 1.0 scheme is estimated at 34% (or Rs 1 lakh crore) of the total standard restructured loan book of Rs 2.85 lakh crore for banks as on September 30, 2021.

And, under Covid 2.0, it is estimated to be at 42% or Rs 1.2 lakh crore. The balance comprised micro, small and medium enterprises (MSMEs) and other restructuring, it said.

The report added that banks have implemented about 83 per cent of the total requests received under Covid 2.0, leading to an overall restructuring of ₹1.2 lakh crore of loans till September 30, 2021.

As per ICRA’s estimates, 60% of the total restructuring of Rs. 1.0 trillion under Covid 1.0 was accounted for by corporates and the balance (or Rs. 0.4 trillion) by the retail and MSME segments. Hence, the restructuring under Covid 2.0, which was available for retail and MSME borrowers, stood at 3x of the restructuring under Covid 1.0. The absence of a moratorium on loan repayments, as announced by the RBI during Covid 1.0, drove higher restructuring under Covid 2.0. Public sector banks (PSBs) were relatively more accommodative with the restructuring requests of borrowers as their restructured books stood at 3.2% of the standard advances vis-à-vis 2.2% for private sector banks.

The restructuring also led to the upgradation of accounts, which would have slipped earlier. This, coupled with the large recovery from Dewan Housing Finance Limited (DHFL) in Q2 FY2022, led to the highest recoveries and upgrades for banks during the last three years. As a result, despite the elevated gross slippage rate of 3.2% in Q2 FY2022 (3.5% in H1 FY2022 and 2.7% in FY2021), the gross and net non-performing advances (NPAs) remained on a declining trend. 

The slippage rate and repayment rate were much higher for private sector banks (PVBs)  compared to PSBs. This possibly means that the moratorium period offered by public banks is likely to be higher than that offered by PVBs. This could also be interpreted from the lower level of dual restructuring of loans (i.e. loans restructured under Covid 1.0 getting restructured again under Covid 2.0) for public banks as a longer moratorium would have obviated the need for second restructuring, the agency added.

Banks have implemented ~83% of the total requests (76% for PSBs and 86% for PVBs) received under Covid 2.0, leading to an overall restructuring of Rs. 1.2 trillion of loans till September 30, 2021. As the restructuring requests can be implemented till December 31, 2021, incremental restructuring could increase by 15-20 bps from the current levels. 

"As the restructuring requests can be implemented till December 31, 2021, (under Covid 2.0 scheme), incremental restructuring could increase by 15-20 bps from the current levels," ICRA said.