Moratorium may lead to greater build-up of credit losses for banks: Moody's

Asia's banking sector profitability will also decline from deteriorating asset quality and lower net interest margins, said Moody's

The loan moratorium extended by regulators in countries like India and China to deal with the liquidity crunch amid COVID-19 crisis will provide temporary relief to borrowers, but will constrain banks from taking proactive recovery actions and could lead to an even greater build-up of credit losses once the moratoriums are lifted, according to Moody's.

In a report on Asia Pacific region, Moody's on Tuesday said while policy stimulus will shore up credit quality for larger companies in sectors, including airline and oil and gas, Asia's banking sector profitability will also decline from deteriorating asset quality and lower net interest margins.

"Financial regulators in China, Australia, Malaysia, India and some other Asian economies have enacted debt moratoriums to soften the liquidity crunch for businesses and households. While repayment delays will provide temporary relief to borrowers, these directives will also constrain banks' abilities to take proactive restructuring and recovery actions. These measures also could lead to an even greater build-up of credit losses once the moratoriums are lifted," Moody's said.

Moody's Investors Service further said this risk will increase substantially if the economic downturn, and measures to contain the spread of the coronavirus, persist for longer than expected.

"In the event of heightened banking sector distress, Asian governments will likely stand behind larger, systemically important banks. We view government support as stable in most of the banking systems that we monitor, reflecting our expectation of extraordinary support, should it be required, to avert financial contagion," it added.

To give relief to borrowers hit by COVID-19 lockdown, the Reserve Bank of India (RBI) last month announced that EMI payments for all term loans, including retail and crop loans and working capital payments, will have the benefit of three-month moratorium.

Stating that Asia's banking systems will face a much more difficult landscape, Moody's said weaker economic prospects and widespread financial market upheaval will translate into a more adverse credit landscape over the coming quarters.

"While the region's banks generally have adequate capital and liquidity buffers to weather the crisis, reduced business activity, lower (or more volatile) asset prices and higher unemployment will weigh on debt affordability and loan repayment.

"Banking sector profitability will also decline because of higher loan-loss provisions from deteriorating asset quality, lower net interest margins due to lower policy rates, and lower fee income on subdued business activity," said Moody's, which has a negative outlook on 16 banking systems in the Asia Pacific region.

Moody's said although Asia's external and fiscal buffers are generally more robust than those in other regions, equipping most Asian governments with more policy space, their policy responses to date will only cushion some of the impacts and not fully offset the economic and credit damage.

Widespread containment measures are crippling domestic consumption and production, which is spilling over to other parts of the region in the form of lower demand for commodities, imported goods and services, and supply chain disruptions, Moody's Assistant Vice President Deborah Tan said.

 

The coronavirus is exposing vulnerabilities in existing systems and we expect policy space to be constrained for economies with existing fiscal challenges or elevated external vulnerabilities, she added.

RBI moratorium: 10% provisioning may shave Rs 35,000 cr off bank profits

The Reserve Bank of India's directive asking banks to make 10 per cent provisions on all moratorium loans will shave at least Rs 35,000 crore off their profitability in financial years 2019-20 and 2020-21, according to a report.

On Friday, the central bank, in its second set of liquidity-enhancing measures announced Rs 1 trillion specifically targeted fund infusion to small- and mid-sized shadow banks, home financiers and micro-lenders, which will ultimately go a long way in offering some succour to the small and medium enterprises.

"While the liquidity boosters will help the small lenders, the RBI has also stipulated banks to create a 10 per cent provisioning on all loans that are overdue but not yet NPAs (non-performing assets) wherein the moratorium is on, over the March and June quarters. This will impact their profitability by Rs 35,000 crore in the March and June quarters," Brickwork Ratings said in a weekend note.

The new provisioning requirement has to be made for the March and June 2020 quarters and this will impact their profitability in 2019-20 and 2020-21. Read full story here