Extension of moratorium till Dec is the only viable option left: Bankers

India’s financial institutions are going through yet another crisis, this time in the shape of a moratorium on repayments, and the best way to avert the crisis, in the absence of a sharp recovery in economic growth, is more moratorium, leading bankers say. 

The original moratorium was for the period of March to May, and then there was another extension that would end in August. But senior bankers say the economy remains almost in deep freeze and the central bank and the government will have no option but to offer another extension to the moratorium. 

A chief executive of a private bank, on the condition of anonymity, said there would be a sharp rise in bad loans after this moratorium period comes to an end. “The current situation is feeble. There is no choice but to extend the moratorium till November-December,” he said.

Another banker said stressed loans would be manageable only when economic units were allowed to work for at least three months to generate adequate resources to resume repayments. Without substantial increase in economic activity and demand, there will not be cash flows for many units or individuals who have availed moratorium.

Affected individuals and companies will again avail it, albeit a little less in number than the first version that ran between March to May. This is because borrowers have been asked to pay later, but banks are not willing to let go the interest, rather it accumulates and compounds leading to eight to 15 equated monthly instalments (EMIs) more for a borrower who has availed a home loan for 20 years or more. A crucial Supreme Court judgment on whether banks should charge interest on the moratorium will make things clearer.

Also, a demand collapse would mean that affected firms are unlikely to remain good borrowers. Eventually, there could be a deep restructuring of loans for companies and even retail customers, several bankers said. The reason for such restructuring, one time or not, would be apparent just looking at the scale of the amount enjoying a repayment holiday. 

Trillions not serviced
 

Apart from retail, the moratorium applies for term and working capital loans too. There is no industry-wide figure as to how much of bank loans are under moratorium, not yet. But calculations by analysts indicate that at least 30-65 per cent of the total loan books could be under moratorium. Rating agency S&P says the regulatory norms, such as setting aside 10 per cent provisions for loans under moratorium, is the strictest in the Asia-Pacific region.

Soumya Kanti Ghosh, chief economic advisor to State Bank of India (SBI) group, estimates that around 35-40 per cent on an average portfolio is under moratorium for the entire financial system, comprising all forms of banks and non-bank financial companies (NBFCs). Banks have a credit book of Rs 104 trillion, and NBFCs another Rs 24 trillion. That would mean, according to Ghosh’s calculation, a whopping Rs 45 trillion to Rs 51 trillion of the total loan is under moratorium for banks. 

The amount of loans under moratorium varies across banks. In terms of percentage of customers opting for moratorium, SBI’s is the lowest among public sector banks at 23 per cent. For Canara Bank & Punjab National Bank, it is 30 per cent; for Bank of Baroda 65 per cent, and for Bank of India it is 41 per cent. However, for private sector banks, it ranges between 25 and 75 per cent. Small finance banks and those dealing with micro lending like Bandhan Bank have seen more than 90 per cent of their micro loan book come under moratorium, Ghosh wrote in his report Ecowrap. 

NBFCs have reported high moratorium, too. Mahindra & Mahindra Financial Services, Shriram Transport Finance, and Cholamandalam Investment and Finance have declared that the moratorium has been used by over 70 per cent of their loan exposure, as of April 2020. If the average interest rate is 8 per cent, the interest component works out to about Rs 2 trillion for a six-month period.

And then, there is the question of credit cards. Even for credit cards, which used to charge 16-24 per cent interest, there is a moratorium in place. This is the segment that has the potential to see the highest spike in bad debt, as these loans are without collateral. Sensing the vulnerabilities, many private sector banks swiftly moved to cut down on credit limits and banned cash withdrawal. Among public sector banks, SBI and Bank of Baroda are the only serious credit card issuers. 

A Bank of Baroda official said the cards were largely given to people who had an existing relationship with the bank. The card spent is monitored and linked with the balance maintained with the bank. There is no cause for concern there. According to a person who knows about the operation, SBI has reduced credit limit for people from private sector, and especially if the person has availed moratorium.

The moratorium itself is not a straightforward story. Banks are not going to forgo the interest payment. In case of retail borrowers, the interest will add back as principal, and in case of term loans, the interest up to August will have to be paid in instalments till March. So, it may end up being beneficial for the banks in the medium to long run. 

That is, assuming, none of the loans will turn non-performing assets (NPA). Problem is, not even the most optimistic expect the loans to remain healthy. 

Bad debts and write-offs
 

Analysts say it is too early to say how much of the loan under moratorium would turn NPA, but it is safe to assume anything between 5 per cent and 10 per cent eventually could in view of the crisis. According to an analyst from a domestic brokerage house, as much as 20 per cent of the moratorium amount could turn NPA, and would require a deep, systemwide restructuring to give more time to repay. That would mean the banks are straightaway looking at an NPA perk-up of as much as Rs 10 trillion (on a moratorium of Rs 50 trillion) by March. If the economic vulnerabilities mean that borrowers may not be able to pay up, that would mean a substantial amount of this NPA could have to be written off. Since write-offs involve capital erosion, banks will have to raise money for that, either from the markets, or from the government.  

Or, banks and authorities can just decide to kick the can down the road through restructuring. The safest bet, though, would be to increase the moratorium period till December, allowing economic activities to pick up.

Financial implication for banks
 

Interestingly, if charging of interest is not banned by the Supreme Court, banks can add the interest back in their outstanding loans and show healthy credit growth even when they are not lending, say analysts. But if moratorium interests are forbidden by the apex court, banks may report a sharp fall in their credit growth number, and in profitability, as they have to write back the nominal interest from their books. 

If the interest charging is not stopped by the court, less people will avail the moratorium, S&P noted. And this may slowly temper down the moratorium risk. The level of moratorium may not rise from the present level, the rater said. 

NBFCs are selling their good loan portfolios cheap in order to stay afloat. Private banks, in particular, are getting active in buying these loans and this may perk up their loan growth and even profitability, analysts say. The loans would be fully recoverable, and given that discounts are steep, the banks can earn hefty margins in the medium to long turn. But it all depends how quickly the economy picks up, on which there is no visibility. 
 

According to Ghosh of SBI, the fourth quarter results of the banks indicate a sequential decline in NPA numbers, which is because that the moratorium has prevented any loan-account to be downgraded and helped banking industry in reining in fresh slippages “but the real picture will emerge after the September quarter.”

According to Fitch Ratings, stress will be visible across most key segments. “Retail unsecured loans are particularly vulnerable, alongside loans to SMEs, which are likely to have experienced the most disruption to cash flow.” Fitch sees around 30 per cent of total loans under moratorium, “but it does not appear that banks are fully accounting for incipient stress by excluding partially serviced loans; for instance, where only one of three instalments have been paid.”

State-run banks have adopted an opt-out approach when granting moratorium, where the choice to exit moratorium is left to the borrower. This is in contrast to the opt-in approach exercised by many private banks, which have extended moratoriums to borrowers on a more selective basis. The former approach poses higher asset quality risk, Fitch said.

According to S&P, the rise in bad loans should lead to heightened credit costs for lenders. The credit costs will likely increase again in the current fiscal year and surpass the highs seen in fiscal 2018.

“We anticipate credit costs will rise to about 3.7 per cent of average loans in fiscal 2021. This cost should drop to 2 per cent in fiscal year 2022, but this would still be above the 15-year average of 1.5 per cent,” S&P said.

Such credit costs would be front-ended in India as the RBI requires banks to provision for at least 10 per cent of overdue loans covered by the moratorium--at least 5 per cent each in the March and June quarters, respectively. 

Going forward, senior bankers say the potential stress coming from accounts under moratorium looks huge, but some factors may reduce the extent of the burden. First, after May when the initial leg of moratorium ended, the number of accounts under dispensation has been coming down. Second, high chances of some restructuring may get introduced, given the realisation that pain from severe economic disruption will here for long.