The pre-provisioning operating profit (PPOP) of the top five private banks by size of advances, constituting 25% of overall banking and 75% of the private bank space, could decline by up to 15% Y-o-Y) in FY21, India Ratings and Research said in a report on Friday. This would decrease the ability of banks to withstand credit costs without capital erosion. The decline in the PPOP would be an outcome of lower portfolio yields due to an increase in slippages, lower loan growth due to slow originations and limited enhancements, lower fee and other income as origination and transaction volumes ramp up over FY21, a slower pace of re-pricing for deposits in the MCLR regime than that for advances and higher liquidity deployed in low-earning government securities or under the reverse repo window. India Ratings believes that the impact of the growth destruction and slowdown in economic activities in the banking sector in the aftermath of Covid-19 won’t be benign. “The sector was putting its house in order after the last six painful years on the corporate side. However, the challenges on the non-corporate side (retail, SME and agri) were already showing up (including in retail) as we entered into the pandemic. The pandemic is likely to aggravate that stress. Ind-Ra also expects that the percentage portfolio under moratorium for these private banks would have increased by May 2020.” India Ratings’ analysis also suggests slippages for FY21 would be around 5% for these banks, as against 2.3% in FY19 and 2.7% in FY20 (net slippages would be lower), if refinancing remains a challenge. At 5% gross slippages, these banks’ net interest margins (NIMs) could contract by 4%.