Elevated NPA levels in banks to remain: Crisil

Mumbai: Rating agency Crisil Research on Monday said that the credit quality of India Inc is gradually recovering, but the non-performing assets (NPAs) in the banking sector are expected to remain at elevated levels as some sectors continue to struggle and several large firms remain highly indebted.

In FY17, there were 1,335 upgrades as against 1,092 downgrades with upgrades being driven by consumption-linked sectors while downgrades were led by investment-linked sectors.

“We expect upgrades to outnumber downgrades in the near term driven by improving domestic consumption demand after demonetisation. Further, several debt-intensive sectors such as metals (especially non-ferrous) and sugar are expected to see improvement in credit quality in fiscal 2018 because of rising prices,” the rating agency said.

These trends would also reduce slippages to NPAs in the banking sector in fiscal 2018. However, the stock of gross NPAs will remain at elevated levels as recoveries would continue to be subdued given that sizeable NPAs are in highly leveraged firms with stretched cash flows.

Several investment-linked sectors such as real estate and capital goods continue to face headwinds. Stress is also building in some micro-finance institutions (MFIs).

On the other hand, firms within consumption-linked sectors such as auto ancillaries, packaging and agricultural products continue to show better credit quality despite moderation in demand due to demonetisation.

This was largely due to favourable and well spread monsoon and the implementation of the Seventh Pay Commission.

In the consumption-linked basket, apparel and luxury goods remained an exception with more downgrades than upgrades largely because of gold and jewellery retailers.

These players, who were reeling under weak demand amid increased regulatory compliance, received another blow in the form of note ban, which led to deferral of discretionary purchases.