Banking Central: Which are the next pain points for banks?

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There have been multiple rounds of bad loan shocks in the banking sector in the post-global financial crisis era. Easy liquidity pushed lenders to chase companies and expand their loan books. A good chunk of such loans turned bad subsequently.

Banks that tried to keep the stress hidden were caught by the aggressive asset quality review exercise launched by the Reserve Bank of India in 2015. Just when the situation seemed to be under control, the pandemic hit the economy last year. The RBI’s loan recast measures will keep the pandemic-induced stress hidden again for a while, but not for long.

Which sectors were most severely impacted by the second COVID-19 wave? The general consensus is that the contact-intensive travel, tourism and hospitality sectors may have seen the maximum number of job losses. Activity in these segments came to a sudden stop in the first wave of the pandemic last year and in the second wave, too, even when construction, manufacturing and financial services managed to survive, these segments suffered hugely yet again.

The RBI announced a Rs 15,000 crore special liquidity window for such sectors on June 4. The question is how severe is the stress in terms of job losses and business losses here? Job losses impact consumer confidence and overall spending patterns, while business stress will reflect in poor repayment capacity.

According to a Moneycontrol analysis, about 7.5 million jobs have been lost across sectors in February-May 2021 alone, the worst-ever in India since liberalisation. This is bigger than the 2007-2009 financial crisis, when about five million jobs were lost.

Most of the big companies tourism and travel have taken a hit.

Thomas Cook India’s consolidated loss ballooned to Rs 416 crore in FY21 from Rs 69 crore in FY20. Online ticketing giant MakeMyTrip’s revenue fell 68 per cent to $163 million in FY21 from a year earlier.

These figures suggest a deep crisis the tourism and hospitality segment during the second wave of COVID-19, with 60-70 percent of the jobs affected.

How much have banks lent to the tourism and hospitality sector? As of April 23, 2021, total lending by banks to tourism, exports and restaurants stood at Rs 50,395 crore as against Rs 47,101 crore a year earlier, a rise of 7 percent. That was a slower growth than the 18 percent jump in the previous 12 months.

Aviation, a sector closely linked to the travel and tourism market, is another pain point. This industry had struggled even in good times.

CAPA – Centre for Aviation highlighted in its India Airline Outlook report for the financial year 2022 that the segment is sitting on losses to the tune of about $8 billion over the past two years.

How exposed is the banking sector to aviation? As of April 23, 2021, banks had outstanding loans of Rs 26,309 crore to the aviation sector, up 8.2 percent on a year-on-year basis, and against a drop of 13 percent in the previous 12-month period.

Micro, small and medium enterprises could also be a stress area for banks as an economic downturn first impacts smaller companies that don’t have as much of a cushion as big ones.

India’s banks survived the previous corporate loan crisis, not because of their ability to recover money from big companies but mainly due to massive loan write-offs. The remaining bad loans have been pushed to bankruptcy courts.

Loan restructuring schemes announced by the RBI last year and this year would help to postpone some of the pain, but a sustainable recovery will depend on how the COVID-19 pandemic pans out and whether the vaccination drive can contain a third wave.

Restructuring of loans only gives promoters temporary breathing space, but ultimately, fresh cashflows matter. Are banks prepared enough for the fresh shock? Only time will tell.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)