COVID-19 Second Wave: Banks brace for impact as vaccination pace slows

Banks are operating only limited hours due to the COVID restrictions across states.

The slow pace of vaccination and the fears of a COVID-19 third wave are threatening to hamper signs of early recovery in the banking sector. Banks are already reeling under stress due to a gloomy economic environment, said bankers and analysts Moneycontrol spoke to.

The only hope is that the ongoing vaccination drive will contain the spread of the COVID second wave. But, the rather disappointing pace of vaccination so far poses a big risk to the industry’s optimism, bankers said.

On May 24, analysts at Kotak Institutional Equities wrote that the pace of vaccination has faltered and the daily average vaccination stood at 1.8 million doses per day.

“India has administered at least one dose to only 11.5 percent of its total population and some of the most populous states are well behind even this level of coverage,” the Kotak report said.

India recorded 1.96 lakh new COVID cases in the last 24 hours and the number of active cases stood at 25.8 lakh on May 25.

Big banks cautious

In the post-result press conferences, leading lenders, State Bank of India (SBI), HDFC Bank and ICICI Bank cited successful vaccination drive as a key factor for growth recovery in the banking sector in fiscal year 2022.

“The sharp rise in COVID cases in recent times and the lockdowns in many places have slightly decelerated the pick-up in the economy that we witnessed in the previous two quarters,” said SBI Chairman, Dinesh Khara on Friday.

“Having said that, with the improvement in vaccination coverage, we expect recovery in the activity level in the next two to three months,” Khara said. The country’s largest lender by assets has guided for a 10 per cent year-on-year credit growth in the current fiscal year.

In the media interactions post the announcement of the Q4 results, HDFC Bank management too said vaccination progress will be key for banking sector recovery going ahead. “That's where the growth is coming from,” said HDFC Bank's Chief Financial Officer Srinivasan Vaidyanathan.

On May 24, HDFC Bank CEO Sashidhar Jagdishan said on a conference call with analysts that the second wave has not impacted the bank as much as the first wave. However, Jagdishan does expect higher delinquencies in the retail segment, particularly in the restructured book and the portfolio that took the moratorium last year.

Similarly, ICICI Bank said that it would wait and watch the trajectory of the vaccination drive for a month or two before it offers a precise outlook on its business.

Vaccination pace slows

So far, the progress of vaccination has not picked up to the desired extent. A senior executive with a mid-sized private bank said it will be “utopian” to believe the whole population will be vaccinated by the end of the current year or even the next year. “The only thing we are hoping for is that there is no third wave, and we get a springboard-like growth in the second half of the year, like last year,” the official said, He requested anonymity.

Lockdowns have been imposed by many state governments in the wake of the second wave of COVID. Although there is no nationwide lockdown this time unlike last year, the state lockdowns have begun to hurt the businesses. Banks are worried that if these lockdowns prolong, the resultant economic stress could impact the repayment ability of the borrowers.

Last year, the central government announced a nationwide lockdown in March last week to curb the spread of the Covid pandemic. The banking sector didn’t feel the heat because of the timely interventions of the Reserve Bank of India (RBI) and the government.

While the RBI announced six months of loan moratorium on all term loans and liquidity measures totalling close to Rs 13 lakh crore, the central government launched a Rs 20 lakh crore stimulus package to support the economy. The RBI also announced a one-time loan recast.

These measures indeed helped to avoid a big spurt in NPAs. A loan becomes NPA if there is no repayment in 90 days. Banks need to set aside additional funds to cover such losses. This impacts profitability.

This year too, the RBI has announced a slew of measures including recast facility for smaller borrowers and certain additional liquidity measures.

Second wave impact

This year too, banking operations have been hit because of local restrictions. Banks are operating only limited hours due to the COVID restrictions across states. There has been a rapid spread of COVID cases among bank employees, forcing banks to cut branch operations. At least 1.5 lakh bank employees have contracted COVID and around 1,500 employees have died so far, according to data from All India Bank Employees Association.

For instance, Kerala has allowed branches to remain open only three days a week.  In April, Raipur in Chhattisgarh went into a 10-day lockdown during which banks were directed to remain shut. Property registration offices and technical valuers’ establishments are also closed in many parts of the country. As a result, banks are unable to disburse loans in the normal course of business.

The COVID restrictions have already begun to impact banks. Retail loan disbursements in April have fallen. “Even what is getting disbursed is mostly already sanctioned loans. First quarter is basically a complete washout,” the banker quoted above said.

Business outlook

Banks are not too hopeful about a significant recovery in the second half of the year. A senior executive at a non-banking financial company (NBFC) said that the extensive spread of the virus in rural areas poses a threat to recovery.

“We may not get the benefit of pent-up demand this year because a lot of people who needed to buy their own vehicles or two-wheelers already bought them last year. Only in some sectors like travel, theatres and hospitality, which have been almost entirely shut down, could we see some vengeance consumption,” the official said. He too declined to be named.

Analysts expect that the impact of the second wave will be contained in the June quarter. In a report dated May 18, brokerage Nomura said it expects lockdown restrictions and the economic hit to be spread out over April and June, although the worst of the impact will likely be in May.

“Overall, in our baseline, we assume that the worst of the economic hit from the second wave will likely take place in Q2 (April-June),” the Nomura report said.