India Rating in its latest report has said that banks are staring at a spike in their credit cost, which is set to rise in the range of 1.9-4.6% for the second half (H2) of the current financial year (FY20) as Non-performing asset (NPA) resolution crawls. In its earlier assessment, the agency had estimated the system-wide credit cost floor at 1.9% and capped it at 4.4% for the second half of FY20.
For the second half, it has revised upwards the credit cost estimate for state-run banks by 30 basis points to 5.2%, while for private sector banks it is pegged at 3.2% at the same level as the previous estimate. It added that any pick up in stressed asset resolutions may result in lower net credit cost.
It said material incremental NPA generation for fiscal 2020 and 2021 may come from the agriculture and MSME sectors. It mentioned that with the RBI giving forbearance to MSMEs until March 2020, some of the incremental stress in this segment can show up in FY21, unless the economy picks up. Muted rural income growth, along with announcements or expectations of farm loan waivers continue to weigh on asset quality of farm loans.