MSME, Aviation, Hospitality Among Industries That Will See Higher NPA Rate In Upcoming Months 

The Federation of Indian Chambers of Commerce & Industry and Indian Banks’ Association published a report that said long term credit demand has been growing in many industries. This report was concluded after a survey was carried out for the period January to June 2022. Over 25 banks, including public and private sector as well as foreign banks participated in the survey. Over 76 percent of the whole banking industry in India is formed by these banks, when classified on the basis of asset size.

According to the survey results, banks who participated in it anticipate an increase in non-performing assets (NPAs) in the MSME sector during the second half of the current calendar year (July-December 2022). In contrast, 82% of banks that responded to the last poll (which was conducted from July to December of 2021) predicted that MSME NPA levels will climb in the first half of 2022.

It's significant to note that a recent report by the Small Industries Development Bank of India (SIDBI) and TransUnion Cibil showed that the MSME sector's non-performing assets (NPAs) increased by 12.59 per cent in the fourth quarter of FY 22 to INR 2.95 lakh Cr. from INR 2.62 lakh Cr. in Q4 FY 21, indicating the impact. In comparison to 12.5 percent for March 21 and 12.6 percent for March 20, the overall MSME NPA rate as of March 22 was 12.8 percent.

The Reserve Bank of India (RBI) also noted in its Financial Stability Report (FSR) from June of this year that even though banks' gross non-performing asset (NPA) ratios in the MSME sector decreased from 11.3 percent  in September 2021 to 9.3 percent in March 2022, the sector's bad assets remained disproportionately high. The INR 46,186-crore restructured MSME portfolio, which made up 2.5 percent of all advances under the May 2021 restructuring programme, has the potential to put pressure on the sector, the report claims.

However, in terms of the overall asset quality across sectors, the ficci-iba survey noted that over 50 per cent of respondents expect gross npa levels to be below 8 per cent by the end of December 2022 while 33 per cent of respondents view gross npa levels to be at 8-9 per cent. The reasons for the same included recovery of the economy from the covid shock, higher credit growth, substantial deleveraging of corporate balance sheets, better performance of industry, healthy capital position, use of recovery agencies, and transfer of NPA accounts to national asset reconstruction company limited (narcl). 

In contrast, those who predicted a high NPA risk of 9–10% in the second half of 2022 cited supply chain disruptions, rising inflation, higher commodity prices, deteriorating asset quality, a potential global recession, and a slowdown in international trade brought on by the expectation of a US recession.

In addition to the MSME sector, other industries that are anticipated to have more NPAs in the upcoming six months include aviation, where 50 percent of respondents predict an increase in NPAs, and the tourist and hospitality industries, where 45 of respondents anticipate an increase in NPAs. The other two out of top-five industries were Power and Retail Trade, where respondent banks anticipated a 35 percent increase in NPAs.

Going forward, more than half of respondents anticipate that Gross NPA levels will be below 8 per cent by the end of December 2022, while 33 per cent expect that Gross NPA levels will be in the 8-9per cent range. The recovery of the economy from the Covid-19 shock, higher credit growth, significant deleveraging of corporate balance sheets, improved industry performance, a healthy capital position, the use of recovery agencies, and the transfer of NPA accounts to NARCL were cited as key factors by respondents who reported gross NPAs to be below 8 per cent and in the range of 8 to 9 per cent over the next six months.

65 per cent of the respondent banks expect NPAs in the MSME sector to increase in the next 6 months. The shift towards digitization, disruptive innovation, and new technologies has led banks to invest substantial amounts to upgrade their information technology infrastructure, leading to higher operating expenses.

37 per cent of respondents reported that their typical technology expenses as a proportion of operational expenses for FY22 were greater than 8 per cent, while 36 per cent reported that it was between 5 and 8 per cent. Around 27 per cent of survey respondents said it was less than 5 per cent. According to 73 per cent of survey respondents, cyber security has emerged as the primary area in which technology investments have increased.

Banks have also proposed expanding Priority Sector Lending (PSL) eligibility to include other industries and sub-sectors, such as the entire Agri-value chain and topics relating to climate sustainability. Banks were questioned if establishing Digital Banking Units would help India move to a digital economy more quickly. All of the respondents answered in the affirmative. Bankers feel that this action will benefit both clients and banks by accelerating and broadening the reach of digital banking services and allowing last-mile financial inclusion.