A number of large banks and non-bank financial firms facing new challenges from the second wave of Covid are projected to see a new surge in non-performing loans as increasing stress across all sectors affects borrowers’ ability to repay.
Analysts estimate that non-performing assets (NPAs) will rise from just under 8 percent in the past fiscal year – supported by restructuring, write-offs and regulatory easing including a credit moratorium – to 13-15 percent in 2021-22.
NBFCs and microfinance institutions (MFIs) report a sharp rise in stressed assets. “Small business owners operating in segments such as salons and restaurants, taxi companies and dealers / dealers in non-essential categories have been hit hard and there was no specific income support for these audiences. There has been a spectacular surge in NPAs in this category, ”a senior private sector banker told The Indian Express on condition of anonymity.
“With incomes not recovering in over a year, we have no choice but to make significant discounts and write-offs,” said the banker.
Bandhan Bank, for example, reported an 80 percent decrease in net income for the quarter ended in March, to Rs 103.03 billion, due to additional provisions on NPAs. The lender, which is focused on micro-business lending, saw its gross NPA as a percentage of total lending increase 533 basis points to 6.81 percent in the fourth quarter of FY21 from 1.48 percent in the fourth quarter of FY20.
Bajaj Finance, in its most recent mid-quarter update, upscaled Q1 and Q2 NPAs as lockouts in April-May hurt asset quality. “The second wave resulted in a small increase in EMI bounce rates in the first quarter of FY22 versus the fourth quarter of FY21. Forward flows on overdue positions have been higher in most parts of India due to restrictions on recoveries amid strict lockdowns. As a result, the company estimates its gross and net NPA higher in Q1 and Q2, ”said a June 4th listing.
In its recent June 4 notes on financial accounts, the Punjab National Bank (PNB) said: “The extent to which the Covid-19 pandemic will affect the bank’s results will depend on future developments, which are highly uncertain, including the success of the vaccination campaign. The most important identified challenges for the bank would result from eroding cash flows and extended working capital cycles. “
Tourism, hospitality, restaurants, salons, aviation, construction, textiles and high-contact services are among the most affected segments. Care Ratings has forecast that the NPAs will account for 7.3 percent (7.93 billion rupees) of advances by March 2021, up from 8.5 percent (8.86 million rupees) in March 2020. This is expected to be in double digits and 15 Percent in 2021-22, experts said.
The Reserve Bank of India has also warned of a possible spike in bad loans to 13.5 percent by September 2021 from 7.5 percent in September 2020. This equates to Rs 14.6 lakh crore of the total bank credit of Rs 108.33 lakh crore.
“It’s difficult to come up with a number given the moratorium and various bank plans, but assets under stress are estimated to be in the double digits (13-15 percent),” said Tarun Bhatia, managing director and head of business intelligence and investigations, Kroll South Asia .
“You have to see how companies that have paid part of their installments (maybe 1 or 2) compare to those that have opted for a moratorium. Also because of the second wave, a significant proportion of those who opted for a moratorium would continue to fight, ”he said.
“The ability of banks and NBFCs to physically collect fees in the current environment may therefore be limited, even if borrowers are able to make the payments. In the face of loss of income or lower incomes, unsecured loan repayment may not be a high priority for many borrowers, ”said Ramya A. Muraledharan, Director – Ratings, Brickwork Ratings.
A clear picture will emerge once the Supreme Court takes action on bad loans, experts said. “After the Supreme Court passed its resolution to lift the asset classification standstill, banks and NBFCs must begin recording gross NPAs based on actual overdue dates starting Q4 of FY 21. This has, in our opinion, increased the transparency in reporting GNPA numbers for the fourth quarter of FY21 and FY21, ”said Muraledharan.
According to Care Ratings, the pressure on asset quality is expected to continue due to the restructuring, particularly in the MSME segment. “Personal loans, particularly unsecured loans, are also expected to experience significant stress. Downside risks include lockdowns in key states, which can affect both the industrial and service segments. Another risk includes the termination in June 2021 of the ECLGS program that backed the MSME loan, ”it said.