In unusual times, some interesting credit trends

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Since the start of the Asset Quality Review launched by the Reserve Bank of India (RBI) in 2015, followed by the Insolvency and Bankruptcy Code (IBC) in 2016, banks’ bad debts have increased in arrow due to a suitable discovery. Since then it has declined due to measures such as write-offs, collections and settlements. In the current phase of pandemic and economic weakness, this trend of improving, or easing of non-performing assets (NPAs), continues in lending to industry.

Basically, banks provide four loan segments: industrial loans, which have the highest incidence of NPA; agricultural loans with the second highest incidence of bad debts; loans to services and then to retail. In FY21, NPAs in industry as a sector improved significantly, and agriculture also showed marginal improvement.

In contrast, loans to services and businesses recorded a slight deterioration. Let’s scratch the surface.

Overall, in 2020-2021, banks showed an improvement in the slippage rate, which measures incremental NPAs. It fell to 2.5% in March 2021 from 3.8% in March 2020. Although there was a decline in large NPA accounts with resolution of cases under IBC and less slippage in the business segment, there has been a relative increase in postcode and retail services.

Within personal loans, all sub-segments such as home loans, auto loans, credit cards and other personal loans posted slippages, with the most notable increase in credit card loans . As mentioned initially, stress is observed in personal loans and MSMEs. According to Care Ratings data, taking retail and MSMEs together, for private sector banks, gross NPA was 2.01% in June 2020, which rose to 2.68% in March 2021 and at 3.32% in June 2021.

For public sector banks (PSBs), by grouping together individuals and MSMEs, the gross NPA fell from 5.99% in June 2020 to 6.52% in March 2021, then to 7.28% in June 2021.

The RBI authorized a one-time restructuring for business, MSME and personal loans, which was open until December 31, 2020 (Box 1). This has been partially extended for loans to individuals and MSMEs and is open until September 2021 (box 2).

According to Care Ratings data, most of the restructurings have been carried out by the PSBs: as of June 30, 2021, the PSBs have restructured nearly ??98,000 crore in advances, while private sector banks have restructured around ??39,000 crore under both frames. The breakdown by segment of the data shows that in Resolution 1, companies had the highest share of resolutions (57%), followed by personal loans (28%) and MSMEs (11%).

If we look at the combined distribution of restructured advances in the two resolution frameworks, retail with MSMEs holds the highest share (54%). What we infer from this discussion is that increasing slippage and restructuring indicates a build-up of stress in the retail segment in a covid-impacted scenario. During the second wave, there had been no general moratorium before, from March to August 2020.

To recap the data on rating agency action, the Crisil credit ratio, which measures upgrades and downgrades, fell to 1.33 in the second half of FY 21. The number of upgrades was 294, against 221 downgrades. During FY21, Icra downgraded 14% of its rated universe and increased by 8%.

Even though the ratio was less than 1, it was still an improvement over before. Care Ratings publishes a measure called the Debt Quality Index on a scale of 100 (base year FY12). This figure improved slightly, from 89.51 in March 2021 to 89.85 in July 2021. India Ratings (a subsidiary of Fitch) downgraded 199 issuers and upgraded 147 issuers in fiscal year 21. Here too , the ratio was less than 1, but it was still an improvement over before.

Now, how do you reconcile stress on retail with improving company ratings?

Companies, on the whole, have done a commendable job of reducing debt and improving margins during times of stress. Personal loans, despite stress, remain the weakest segment of the NPA for bank loans (around 2.5% in FY21) and industry, even after the improvement, remains the most stressful (around 10% in FY21). In personal loans, credit cards are the hardest hit, with APNs falling from 1.5% in FY20 to 3.5% in FY21. This is a message for people to be more moderate in the use of credit cards.

Joydeep Sen is a corporate trainer (debt markets) and author.

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