Indian
banks were gearing up for an upcoming credit boom in the second half, but they may have to look at the dire warning of
RBI‘s fiscal stability report unveiled in January.
Most of the banks are set to report good fourth-quarter results, but the recovery may give way to despair in the coming months. An uncontrollable spike in Covid cases has raised the prospects of lockdowns and strict curbs being extended to May, at least. This may nip the nascent recovery and lead to the closure of many businesses, which are already reeling from revenue crunch. The lockdowns may also lead to unemployment, hit repayments and lead to defaults by companies and individuals out of job.
“In the first year we did not see any impact as 20% additional money was given. Guaranteed loans were given so no bank gave a second thought in giving the loans. In many cases, my customers went to other banks and got loans. Problems were not revealed on the first wave. In the second wave no such support is given so naturally, the impact of the second wave will be much larger on the bank,” a senior banker said on the condition of anonymity.
The unemployment rate in urban India is rising in the current months. From 7.21% on April 4, it jumped to 9.81% for the week ended April 11 and further to 10.72% for the week ended April 18, according to CMIE.
Early signs of rising stress are visible; HDFC Bank has reported a rise in cheque bounce cases in April. The rate is back to January level after improving in March.
Also, with lockdown in states like Maharashtra, which account for 24% of all loans, banks are in a double whammy. About 80 per cent of the new infections are being reported in six states which account for 45 per cent of banking sector loans.
Another banker said that credit growth is going to be muted. “Due to this unexpected wave, no investment is going to be placed right in any industry because of this uncertainty. Even though the government says there is not going to be a complete lockdown, like last time but still the impact can be easily known because of people’s fear,” the banker said.
“So those who want to invest, they’ll take a backseat that let’s wait and see. And the money circulation is going to be impacted. Moreover, the stay on NPA classification, which was lifted by Supreme Court, is going to add soon many NPAs to the banking sector. These things will definitely impact. Banks are kept out of the purview of this lockdown but people should come to banks you know and do their activity,” he added.
RBI stress test
Bank NPAs may rise to 13.5% under the baseline stress test scenario by September, the highest in more than 22 years, according to the RBI’ financial stability report in January this year.
The gross bad loan ratio of banks which stood at 7.5% as of 30 September, could almost double to 14.8% under a severe stress scenario, RBI warned. Under the severe stress scenario, RBI has assumed a 7.6% economic contraction in the six months to 31 March and a tepid 3.8% growth in the first half of the next fiscal. However, uncertainty over vaccines and the severity of the Covid wave hobbles the 3.8% growth projection.
The last time banks saw such stress was in 1996-97 when the bad loan ratio rose to 15.7%.
No cover this time
Banks, which got protection and support by a swift moratorium on loans when the pandemic first struck, have no such cover this time.
As the second wave intensifies, most of the relief measures and schemes announced by the government and Reserve Bank of India have expired. On top of it, the central bank is non-committal on moratoriums.
In today’s conditions, there is no need for a moratorium,” RBI governor Shaktikanta Das said after the central bank’s monetary policy review.
Also, a spike in overdue loans after the lifting of the moratorium has been worrying analysts.
“The level of loans in overdue categories has increased after the moratorium has been lifted and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks,” rating agency Icra had said in a report.
On top of it, banks may have to foot the bill for compound interest waiver relief to borrowers. HDFC Bank has already provisioned Rs 500 crore for the waiver.