Banks and NBFCs seem to be reasonably comfortable with the ‘Covid’ and other provisions they have created over the past three quarters.
Banks and NBFCs are likely to emerge as the clear winners out of the ongoing pandemic in the current fiscal year 2020-21. Banks and diversified financing firms (NBFCs) may see a 37 per cent increase in the net profits this fiscal, followed by another 20 per cent rise in FY22, said a report by Kotak Institutional Equities research. Despite the uncertainty mounting over the macroeconomic outlook, the rise in the profits is expected to be driven by a fall in provisions for PSU banks and certain private banks, the report added. It is to be noted that most banks and NBFCs have made large provisions over the last three quarters in anticipation of an increase in credit costs due to the pandemic.
Banks and NBFCs seem to be reasonably comfortable with the ‘Covid’ and other provisions they have created over the past three quarters, the report underlined. However, there are still concerns about high slippages and credit costs in MFI loans, MSME loans, and personal unsecured loans. However, the large sanctions and disbursements under the government’s Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs may have mitigated the problems of the MSME sector.
While the strong performance of the rural economy and a sharp increase in collection efficiency for MFIs and NBFCs have reduced the concerns about rural MFI loans, urban MFI loans and unsecured personal loans may still pose challenges. It is also expected that the Net Interest Margins of the larger banks and NBFCs could make a sudden jump.
Meanwhile, there can be a significant fall in the banks’ cost of funds given large liquidity and weak credit demand, which has resulted in banks being able to raise cheaper funds in wholesale markets and reduce their retail term deposit rates. On similar lines, the stronger NBFCs may also see a lower cost of funds given the low rates in money and bond markets. While most of the industries were struggling during the lockdown months, the role of banks and NBFCs further strengthened as the government also used them as a tool to support other segments.