Agriculture, small business and retail lending will worry banks in FY21

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After a prolonged period of problems with large-volume exposures, it will be loans to agriculture, small businesses and unsecured personal bonds that will become a problem for banks in 2020-21, a rating agency said on Thursday.

The size of the stressed banking book identified after an analysis of over 30,000 companies is smaller than in the same period last year and the gradual slips of companies will slow down in the new fiscal year, India Ratings said.

The comment comes after over six years of stress from corporate exposures that have severely impacted bank profitability and have forced the government to invest more capital in the banks it runs.

The RBI also estimated a decrease in stress in its biennial stability report in December.

Loans to agriculture, micro, small and medium-sized enterprises and retail advances are “worrying,” Deputy Director Karan Gupta told reporters here.

He said that over the past two years, banks have focused more on the unsecured loans by expanding credit cards and personal loans faster.

The quality of retail product assets is deteriorating, he said, pointing out that all major segments like auto, education, and personal and credit cards have seen faster growth in NPAs.

Meanwhile, the agency also pointed to potential concerns lenders await on this front, suggesting that employment and wage growth in the economy has lagged behind retail lending growth.

In the MSME segment, too, NPAs continue to grow, he said, adding that NPAs account for 14 percent in government-contracted MUDRA loans.

It said, however, that the MUDRA loans are not as problematic as they appear to be due to coverage like the loan guarantee trust for MSEs.

On the corporate side, 17.9 percent of total bank loans, or Rs 18.5 lakh crore in prepayments to the large value segment, were classified as stressed in September 2019, down 19.3 percent in the same period last year.

The agency said 3.9 percent of advances that are now classified as standard stress assets are at the highest risk of slipping into NPAs, and those come mostly from the power, real estate and construction sectors.

The reduced stress will lead to a moderation in the cost of borrowing or the amount of money that must be set aside for acid bets, it said.

Meanwhile, the agency also said the trend of “indirect privatization” of the banking sector, seen in higher growth in deposits and borrowing over the past five years, will continue into FY2020-21.

There will be fierce competition for deposits, it said, adding that private sector banks have come out on top in this battle as they offer higher interest rates and have also developed the ability to get borrowers to pay higher interest rates to protect their margins.

It gave private sector banks a stable outlook, while state banks were rated “Rating Watch Evolving”.

On the frontline of non-bank lenders, or NBFCs, the agency said there will be a divergent trend, with some select NBFCs growing due to better liability management, access to capital and distribution networks while others will be laggards.

There was an improvement in asset-liability management issues that led the NBFC sector into crisis, adding that companies will rely more on bank and off-balance sheet financing than market-based financing.

The agency said it had a negative outlook on wholesale NBFCs as well as commercial vehicles.

The Loans-on-Real Estate segment also has a negative outlook due to weaker pricing and asset quality challenges, tractors as a segment also have a similar outlook of uneven and unusual rainfall, while a wider economic slowdown has led to the same outlook for construction equipment as well.

The outlook for the microfinance segment is also “negative” in terms of asset quality trends, while gold loans are the only segment that received a “stable” outlook from the rating agency, it said.

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