Pandemic worsens banks' condition

Rajnish Kumar, chairman of the country's largest bank, State Bank of India, says, "I have money, but there is no one to make money." So this indicates that the bank's loan market in the country is also being affected by the biggest crisis of this period.

Due to less debt, banks currently have a lot of cash on which they have to pay interest to depositors, but this time they have to be deprived of their main business which is related to earning interest by giving loans. This reflects Kumar's disappointment. At the Confederation of Indian Industry (CII) meeting this month, he said, 'I keep hearing a lot about risk aversion among bankers. But isn't the notion of risk aversion even among the borrowers?

This is a valid question as questions have been raised on the bankers of the country generally about laziness. Data from the Reserve Bank of India (RBI) shows that loan growth has fallen by 50 percent to barely 6 percent year-on-year. This prediction is very serious. Rating agency Crisil estimates that credit growth for the fiscal year maybe 0-1 percent, which is about 800 basis points lower than the pre-epidemic estimate of 8-9 percent.

Crisil's senior director Krishnan Sitharaman says, "The crisis is unprecedented and the economic consequences will be similar." For example, along with the demand for lower capital expenditure, people will spend more consciously. This will slow down the rate of borrowing in all sectors in the current financial year. Corporate loan portfolios are expected to be the worst hit.

Although the rating agencies and bankers are confident that the demand for credit will be low, the latent demand can be sought from the agriculture sector and micro, small, and medium enterprises (MSMEs). The market is taking precautions against risk. Meanwhile, non-banking financial companies (NBFCs) are also slowly making a comeback. Perhaps this is the reason why some bankers remain hopeful. AK Goel, managing director (MD) and CEO (CEO) of UCO Bank, says, “There is a lot of demand in sectors like MSMEs and NBFCs. We are seeing demand due to good crops in the agriculture sector also. I believe that aggregate demand will gradually pick up. The credit distribution level of the bank is 30-40 percent of the sanctioned limit. S Harishankar, MD & CEO, Punjab & Sindh Bank, says the demand for loans is low but it is showing some improvement with the gradual removal of lockdown. He says, "The current demand is from MSMEs. But its progress has been slow. So far, the bank has been able to disburse only Rs 150 crore as against Rs 1,200 crore earmarked for MSMEs. This is partly because banks themselves are changing their eligibility criteria for customers, especially for the retail sector.

Credit growth is part of the challenge. Loss of jobs and pay cuts will hurt retail borrowers but companies will be equally affected as their business remained closed for more than two months of lockdown. Some analysts suggest that if banks are not careful, gross non-performing assets or implicated debt could double from the current 9.3 percent. For example, Anant Narayan, senior analyst (India) of the Observatory Group estimates that the level of gross NPAs could be as high as 18-20 percent of advance loans as GDP growth is also declining and an additional 28 in various affected areas from the lockdown -30% advance loan will be at risk. From the base point of view, according to rating agency Icra, by March 2021, the gross NPA will increase to 11.3-11.6 percent.

At the same time, India ratings are talking of a decline of up to Rs 5.5 lakh crore in the country in 2020-21. It estimates that companies may contribute around Rs 3.4 lakh crore, while non-companies, including retail, agriculture, and MSMEs, contribute about Rs 2.1 lakh crore. Suresh Khatanhar, deputy managing director of IDBI Bank, says the bank has revisited the existing rules for borrowers in retail. The score has been rigorously reviewed and the debt: value (LTV) ratio reviewed. Many bankers say that if a person has taken advantage of the postponement of the payment period, it automatically indicates a risk to the bank. Although this does not affect the previous credit details of the customers, banks may not be ready to give them new loans.

Banks have reduced credit card limits and in most cases, private banks have scrapped the facility of withdrawing cash using credit cards. Khatanhar says that banks are taking a cautious approach in lending to people in special industries like aviation, tourism, and hotels. He says, "Risk can be taken only for those who have a good score for taking a loan."

Those who have availed payment postponement may get increased interest. However, the picture related to this issue will be clear only when the Supreme Court will give an important decision on it. However, for those who have not yet availed of postponing the loan payment, it will be difficult to repay the loan.

It is a vicious cycle and this cycle will affect everyone. Government banks control over 70% of the banking sector in the country, so the government will also be affected by this. As a result, defaults will increase and there will be a lot of requests for restructuring of debt. It will be interesting to see whether the banks would like to drag the defaulters in the NCLT to pay the debt for the insolvency proceedings.

Experts say that if they do, there will be two possible consequences. First, there will not be enough buyers for the troubled asset and the solution will be almost impossible, while the second, banks will eventually have to be prepared to bear the loss from almost all the distressed debt.

Abijah Dewanji, head of financial services at EY, says, "Banks do not seem fully prepared because no one has started the process of identifying potential lenders for restructuring nor are they actively involved with them."