The Indian banking industry is preparing for the upcoming credit boom in the second half of the year, but they may have to examine the dire warnings of the financial stability report issued by the Reserve Bank of India in January.
Most banks will announce good results for the fourth quarter, but the recovery may make people feel hopeless in the next few months. The uncontrollable surge in coronavirus cases has increased the likelihood of lockdowns and strict restrictions until at least May. This may stifle the nascent recovery and cause many companies that are already obsessed with revenue crunch to close. The lockdown may also result in unemployment, repayment of debts, and defaults that result in unemployment for companies and individuals.
In the first year, we did not see any impact because an additional 20% of funds were provided. Guaranteed loans were provided, so no bank would consider providing loans. In many cases, my clients went to other banks and obtained a loan. No problems were found in the first wave. In the second wave, without such natural support, the second wave will have a greater impact on the bank, said a senior banker who asked not to be named.
In recent months, the unemployment rate in Indian cities has been rising. According to CMIE, the index rose from 7.21% on April 4 to 9.81% for the week ending April 11, and further to 10.72% for the week ending April 18.
Early signs of pressure rise are obvious. HDFC Bank reported an increase in cheque bounce cases in April. After an improvement in March, the ratio returned to January’s level.
In addition to this, because states such as Maharashtra accounted for 24% of all loans, these countries were under lockdown period, and banks fell into a double blow. According to reports, in six states, there are about 80% of new infections, accounting for 45% of banking loans.
Another banker said that credit growth will be curbed. Because of this unexpected wave and due to this uncertainty, no industry will make any investment. The banker said that although the government stated that it would not impose the complete lockdown as it did last time, the impact can still be easily known due to people’s concerns.
So those who want to invest will wait in the back seat and let’s wait and see. Currency circulation will be affected. Besides this, the Supreme Court has canceled the reservation of the non-performing asset category, which will soon add a lot of non-performing assets to the banking industry. These things will definitely have an impact. Banks are not affected by this lockdown, but people should go to banks you know to do their activities, he added.
RBI Stress Test
According to the Financial Stability Report of the Reserve Bank of India in January this year, by September, under the benchmark stress test, the bank’s non-performing assets may increase to 13.5%, the highest level in more than 22 years.
The Reserve Bank of India warned that under severe pressure, as of September 30, the bank’s total non-performing loan ratio was 7.5%, which may almost double to 14.8%. Under a severe stress scenario, the Reserve Bank of India assumed an economic contraction of 7.6% in the six months ending March 31 and modest growth of 3.8% in the first half of the next fiscal year. However, the uncertainty over the Covid vaccine and the severity of the Covid wave hindered the 3.8% growth forecast.
The last time banks saw this pressure was in 1996-97 when the non-performing loan ratio rose to 15.7%.
No Cover This Time
Banks were protected and supported by swiftly suspending loans when the pandemic first broke out, but this time there is no such guarantee.
As the second wave intensifies, most of the relief measures and plans announced by the government and the RBI (Reserve Bank of India) have expired. Most importantly, the central bank does not comment on the moratoriums and suspension of transactions.
Under today’s circumstances, there is no need for a moratorium. The Governor of the Reserve Bank of India, Shaktikanta Das, said after the central bank’s monetary policy review.
In addition to this, after the suspension order was lifted, the surge in overdue loans also worries analysts.
After the moratorium has been lifted, the level of overdue loans has increased, and because various interventions and relief measures have prevented a major one-time blow to bank profitability and capital, the impact on asset quality will spread to 2021 and 2022, the rating agency Icra stated in the report.
Most importantly, the bank may have to bear the cost of providing compound interest relief to borrowers. HDFC Bank has prepared 5 billion rupees for this waiver.
As Covid Intensified, Bank And NBFC Loan Collections Dropped By 10%
The bank suddenly turned to normal in April. Starting from the first two weeks of this month, loan collections from banks and non-bank financial companies have declined. As companies and businesses were affected by lockdown, collections dropped by 5% to 10%.
Banks are making slow progress in payment, and they feel the difficulties in the future. The most severely affected are the micro and small enterprises, microfinance, and commercial vehicle (CV) sectors, whose collection efficiency is declining rapidly.
Weak Business Activity
According to a report by Emkay Global, due to reduced working hours and the onset of the second batch of coronavirus infections, business activities in the first two weeks of April 2021 were weak, and activities in various departments fell by 20%. With the implementation of stricter local lockdowns, this situation is expected to decline further.
From August to September 2020, the collection efficiency of asset classes improved month by month. However, a year ago, the limits announced so far are low in trajectory or intensity. Therefore, although it will have an impact on collections and defaults, its impact should be lower than that in the first quarter of last year.
However, if the number of cases accompanied by containment measures and restrictions increases, this may further affect collections.
As far as NBFCs are concerned, gold loans and housing loans NBFCs are the least affected, while unsecured loans, MSME loans, and wholesale loans are more affected by the category of potential borrowers.
The spread intensity and duration of the epidemic, the duration of lockdown and containment, and the trajectory of the vaccine will determine the severity of the hit to banks.
Customer Cash Flows
The salaried class includes a large portion of IT professionals. Although their discretionary (disposable) expenses have been reduced, their salary levels and work have not been affected.
However, most of the salaried class faces the risk of salary reduction and unemployment. Among the self-employed, people in basic fields such as pesticides and pharmaceuticals are not affected much, but others have faced a decline in cash flows.