Lockdown 3.0: Banks may need more regulatory support amid Covid-19 crisis

With credit cost expected to increase by 200-350 bps across banks, asset quality may deteriorate to FY18 levels

With the nationwide lockdown extended to May 17, banks are once again seeking some regulatory dispensation and relaxation in asset recognition norms. The most popular of all demands is an extension of the three-month moratorium, which is set to end on May 31.

“When the moratorium was announced on March 27, the anticipation was that the lockdown will end by April 15 and businesses will resume to near-normal operations. All that has been pushed back,” said a senior executive of a private bank, who feels it’s logical for the Reserve Bank of India (RBI) to extend the period of moratorium given the current situation.

News reports also suggest that a move of this sort is quite likely, especially after a meeting between the RBI governor and banks executives last Saturday.

The chief executive of a private sector bank said: “It is very difficult to understand why there is a delay economic package. Sooner the government comes up with it, the better. Not just the government, the Reserve Bank of India, too, needs to extend the moratorium (which ends on May 31)."
 

"This three-month period is not going to help anybody. We need to understand that once the lockdown is lifted, resuming economic activity would also take time,” he said.

 

 

As banks are in the middle of the June quarter (Q1) of FY21 and fresh loan disbursements have been almost negligible, there’s a growing realisation that if the moratorium isn’t stretched by another three months, until August 2020, its ripple effect on asset quality may be very painful. Moreover, banks say it is only since the end of April that enquiries and applications for a moratorium are on the rise. As banks had received 65-70 per cent of the outstanding monthly/quarterly instalments in March, Q1 instalment receipts, which will fall due from mid to end June, will be the real test to borrowers’ repayment capabilities. “Unless the moratorium is extended, non-performing assets (NPAs) can be significant in Q1,” said another banker.

Analysts at Jefferies note if the RBI restricts the moratorium on loans and special packages only to affected segments, there could be a material downside risk to the asset quality and the broader economy. Microfinance, vehicle loans, unsecured retail loans, and loans to small and medium businesses are being viewed as troubled segments. According to Jefferies’ estimates, top public sector and private banks have 27-40 per cent exposure to these troubled pockets. Further, they note that without additional support from the RBI, the delinquency ratio of banks may touch 5 per cent in FY21, a neat 150 basis points jump year-on-year (YoY), and slippages or loans turning bad can mount to nearly Rs 3 trillion.

Krishnan Sitaraman, senior director, financial sector and structured finance ratings, CRISIL, is of the view that NPA may shoot up from the current 9.5-per cent mark to 11-11.5 per cent, the levels last seen in FY18, when asset quality pressure peaked for Indian banks.  “Weak loan growth will also keep NPA ratios elevated,” he said.

But the real question, as he puts it, is whether the moratorium by itself will solve the NPA issue. "Not quite," he said. While emphasising that an extended relief may give banks some breather, it won’t entirely resolve the asset quality issues. “Offering a moratorium doesn’t indefinitely push back NPAs. At some point, the asset quality issues have to be recognised and this has to happen in FY21 — whether in the June quarter or the December quarter, it doesn’t matter,” he explained.