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CRISIL Ratings: India credit quality outlook for FY22

Loan growth to recover to 9-10% for Banks over FY22, GNPA to rise to 10.5-11%

CRISIL Ratings hosted a webinar to discuss the current credit quality trends and the outlook ahead. The discussion revolved around a range of topics, including: a) credit quality trends across sectors; b) credit growth outlook for Banks/NBFCs; c) asset quality impact on Banks and NBFCs. Key takeaways:

Improving credit quality trends in the corporate sector, outlook optimistic

* The credit ratio (i.e. number of upgrades to downgrades) improved to ~1.3 times in 2HFY21 after witnessing decade lows of 0.54 during 1HFY21. Total number of upgrades during 2HFY21 was 294 v/s downgrades of 221. This is much better than that anticipated earlier during the COVID-induced lockdown. Various government/regulatory announcements such as ECLGS /liquidity measures helped jumpstart business activity.

* Many high frequency indicators suggest a strong rebound across many business segments. Demand in 34 of the total 42 sectors has recovered fully, barring Retail, Airlines, Hotels and Resorts, Airline operators, and Residential RE. The 34 sectors (in which demand has fully recovered) comprise 89% of total rated debt, while the most affected (six) sectors comprise 4% of total rated debt only.

* Among segments of GDP, Manufacturing showed a sharp rebound, while Services is still below pre-COVID levels as demand for Travel and Hospitality is still lower. Agri GDP growth has been stable backed by a good monsoon.

* Pharma, Agrochemicals, Chemicals Specialty, IT, Cement, Oil and Gas, and Telecom are highly resilient sectors, where demand has fully recovered. These sectors witnessed the highest number of upgrades, with credit ratio above one.

* Sectors such as Construction, Engineering, Renewable Power, Pipe and Fittings, and Mining are medium resilient sectors, where demand has recovered. These sectors witnessed upgrades and credit ratio still remains below 1. However, the recovery in sectors such as Education and Textile is still below 100%.

Expect GNPA to rise to 10.5-11% by FY22; one-time restructuring between 2% and 3% of loans

* CRISIL expects slippages to remain elevated in the Retail/SME segment. It expects gross NPAs to rise to 10.5-11% by FY22 v/s (7% as of Dec’20, with dispensation, and 8% including pro forma NPAs). It sees one-time restructuring between 2% and 3% of loans.

* It expects non-Banks to witness higher stress with stressed assets to increase to INR1.5-1.8t, with higher delinquencies in the Real Estate financing and unsecured loans.

* Initially, CRISIL sees delinquencies rising in the Vehicles portfolio, particularly in the CV segment, but the recovery would be faster.

* The Multiplex sector is highly vulnerable, but debt in the sector remains low.

Credit growth to improve with Banks gaining share from NBFCs

* Credit growth for Banks is seeing a sharp ‘V’ shaped recovery. From a decline of 0.8% in 1HFY21, it grew by 5-6% over 2HFY21, aided by ECLGS disbursement and rising consumer demand. With the economic outlook improving, CRISIL expects credit growth for Banks to increase by 9-10% YoY over FY22.

* Banks will also gain market share from NBFCs, which is expected to grow at 5- 6% YoY over FY22. The credit growth estimate is based on an 11% GDP growth assumption over FY22.

* Among retail segments, the demand of Home and Vehicle loans is showing a robust momentum due to benign interest rates. It expects Banks to gain market share from NBFCs in these segments.

* Gold loan is one of the segments that has performed well in the midst of the COVID-19 pandemic. It does not expect any major delinquency with the recent sharp correction in gold prices.

Other important highlights:

* Auto dealers and the Gems and Jewelry sector is currently benefitting from pent-up demand.

* The Renewable Power (solar and wind) sector is doing well, with improving Power demand. Recently, loans from REC/PFC has helped in the revival of the sector.

* CRISIL expects Passenger Vehicle segment to grow over 20% YoY in FY22. Some of the Car models have a waiting period of 5-6 months. The government’s focus on Infrastructure spending would aid revival of the CV segment.

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