Every cloud has a silver lining. Bankers are living by the expression after the catastrophic floods wiped out livelihood of millions in Kerala.
While the state is just about crawling back from the natural calamity that hit it earlier this month, banks are staring at a rise in non-performing assets (NPAs) from loans in Kerala due to likely delay in collections and repayments.
However, putting forth an optimistic view on Tuesday, Kerala-based Federal Bank’s Managing Director and Chief Executive Officer Shyam Srinivasan told analysts and investors that retail credit demand will grow as individuals would try and bring back their lives to normal.
He said the bank would incur costs of about Rs 8-10 crore to restore the damages caused to the bank's infrastructure but added that the deposits and credit will grow going forward.
“Floods may have a positive impact considering that the flow could increase to compensate the wealth destruction that has happened. It is still not clear if there is a big direct overlap between flows and borrowers. In other words, it is not clear if borrowers have access to other sources of cash flows,” said a note by Kotak Institutional Equities.
A senior State Bank of India (SBI) official said, “We are helping the state to bring the situation under control and giving them time to rebuild their lives. With the help, it will also bring in demand for the loans to rebuild and reconstruct their houses and businesses.”
The banker added that they are asking their officers to be more considerate and go slow on the collections. “But there is no official leeway given unless the government or the Reserve Bank of India (RBI) announces as it may disrupt credit discipline for other borrowers.”
On the whole, though, Kerala contributes only about 3 percent of total bank loans and 4 percent of total deposits of the banking sector.
Kerala's outstanding bank credit stood at Rs 2.81 lakh crore as of Q4FY18 ending March. There has been an increase in credit growth in the region in recent quarters. The year-on-year credit growth was 14.2 percent in 2017-18.
“We believe that reconstruction activity would entail higher borrowings by the households and businesses, resulting in an increase in bank credit off take/growth in the region. Credit growth could grow by 17-21 percent year-on-year in Kerala this year assuming all average rebuilding expenditure by households of the order of Rs 50,000-Rs 1 lakh per unit is financed by banks. It is however likely that a large part could be from NBFCs (non-banking finance companies) too,” said a Care Ratings report.
Lending in Kerala is primarily dependent on agriculture or retail and less on industrial activity while the state’s contribution to non-resident deposits is quite high at approximately 20 percent of the overall non-resident deposits.
Despite a low contribution to overall business for most banks, there are four regional banks who have a high share of dependence from this state. Federal Bank, Dhanlaxmi Bank, South Indian Bank, and Catholic Syrian Bank have 35-65 percent of their loans and 50-75 percent of their deposits coming from Kerala.
Federal Bank, among the largest lenders in Kerala, expects its bad loans from Kerala to go up 20-30 percent in the next two-three quarters, from average levels of Rs 150-170 crore in the last eight quarters, amid some implications on credit.
Analysts estimate that banks will have to restructure a large portion of their loans to the state and hence provisioning requirements will increase in the coming quarters.
In terms of deposits, Federal Bank expects remittances to increase substantially due to the weak rupee and given the support needed by Kerala pointing to the large Kerala-origin non-resident Indians.
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