Mumbai (Maharashtra) [India], July 10 (ANI): The pre-provisioning operating profit (PPOP) of top five private sector banks by advances size can decline by 15 per cent year-on-year in the current financial year as compared to 4.9 per cent in FY20, India Ratings and Research (Ind-Ra) said on Friday.
This will decrease the ability of banks to withstand credit costs without capital erosion. These banks constitute 25 per cent of overall banking and 75 per cent of private bank space.
It will be an outcome of lower portfolio yields due to an increase in slippages, lower loan growth due to slow originations and limited enhancements, lower fee and other income as origination and transaction volumes ramp-up over FY21, slower pace of repricing for deposits in the marginal cost of lending rate (MCLR) regime than that for advances, and higher liquidity deployed in low earning government securities or under reverse repo.
Ind-Ra expects the PPOP of private banks to be about 80 basis points lower than their steady-state PPOPs in FY21(FY20: 4.9 per cent).
It said the impact of GDP destruction and slowdown in economic activities in the aftermath of COVID-19 will not be benign. The banking sector was putting its house in order after the last six painful years on the corporate side.
However, the challenges on the non-corporate side (retail, SME and agri) were already showing up. The pandemic is likely to aggravate that stress. Ind-Ra also expects that the percentage portfolio under a moratorium for these private banks would have increased by May.
Ind-Ra's analysis also suggests that the slippages for FY21 will be around 5 per cent for these banks as against 2.3 per cent in FY19 and 2.7 per cent in FY20 if refinancing remains a challenge. At 5 per cent gross slippages, these banks' net interest margins (NIMs) could contract by 4 per cent. (ANI)