Threat of third wave of Covid-19 poses risk to asset quality, especially the restructured loan book: ICRA


With incremental restructuring under Covid 2.0, the overall standard restructured loan book for banks increased to 2.9% of standard advances as on September 30, 2021 (2.0% as on June 30, 2021). Most of this restructuring includes borrowers impacted by Covid 1.0 and 2.0. Restructuring under Covid 1.0 is estimated at 34% (or Rs. 1.0 trillion) of the total standard restructured loan book of Rs. 2.85 trillion for banks as on September 30, 2021, while restructuring under Covid 2.0 is estimated at 42% or Rs. 1.2 trillion. The balance comprised micro, small & medium enterprise (MSME) and other restructuring (refer Exhibit 3).

Moreover, as per ICRA’s estimates, 60% of the total restructuring of Rs. 1.0 trillion under Covid 1.0 was accounted for by corporates and the balance (or Rs. 0.4 trillion) by the retail and MSME segments. Hence, the restructuring under Covid 2.0, which was available for retail and MSME borrowers, stood at 3x of the restructuring under Covid 1.0. The absence of a moratorium on loan repayments, as announced by the Reserve Bank of India (RBI) during Covid 1.0, drove higher restructuring under Covid 2.0. Public sector banks (PSBs) were relatively more accommodative with the restructuring requests of borrowers as their restructured books stood at 3.2% of the standard advances vis-à-vis 2.2% for private sector banks (PVBs).

The restructuring also led to the upgradation of accounts, which would have slipped earlier. This, coupled with the large recovery from Dewan Housing Finance Limited (DHFL) in Q2 FY2022, led to the highest recoveries and upgrades for banks during the last three years. As a result, despite the elevated gross slippage rate of 3.2% in Q2 FY2022 (3.5% in H1 FY2022 and 2.7% in FY2021), the gross and net non-performing advances (NPAs) remained on a declining trend.

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As can be seen from Exhibits 1 and 2, the slippage rate and repayment rate were much higher for PVBs compared to PSBs, which possibly means that the moratorium period offered by public banks is likely to be higher than that offered by PVBs. This could also be interpreted from the lower level of dual restructuring of loans (i.e. loans restructured under Covid 1.0 getting restructured again under Covid 2.0) for public banks as a longer moratorium would have obviated the need for second restructuring.

Commenting on the developments, Mr. Anil Gupta, Vice President – Financial Sector Ratings, ICRA Ratings says: “With the increased spread of the new Covid-19 variant, i.e. Omicron, there is a high possibility of the occurrence of a third wave. As banks restructured most of these loans with a moratorium of up to 12 months, this book is likely to start exiting the moratorium from Q4 FY2022 and Q1 FY2023. Therefore, a third wave poses high risk to the performance of the borrowers that were impacted by the previous waves and hence poses a risk to the improving trend of asset quality, profitability, and solvency.

Banks have implemented ~83% of the total requests (76% for PSBs and 86% for PVBs) received under Covid 2.0, leading to an overall restructuring of Rs. 1.2 trillion of loans till September 30, 2021. As the restructuring requests can be implemented till December 31, 2021, incremental restructuring could increase by 15-20 bps from the current levels.

“The third wave could revive the demand for the restructuring of loans, including loans which were already restructured. In such a case, visibility on the performance of the restructured loan book, which was earlier expected in FY2023, may now be expected in FY2024 as the moratorium on the existing restructured loans could be extended,”adds Mr. Gupta.