Coronavirus pandemic: To prevent NPAs, government needs to infuse specific fund related capital

One of biggest fallouts of the COVID-19 outbreak in India would be a surge in banks' non-performing assets (NPAs).

Banks and non-banking finance companies are staring at the possibility of a huge surge in NPAs, not just from the corporate sector loans but also retail loans. A complete pause in economic activities and impending uncertainty in employment would see companies and households struggle to deal with the fallout.

In order to revive growth once the tide turns, lenders would need to lend aggressively. "So when initially, the problem began, instead of running after the money or running after the borrower, our systems started running after bankers. And that created a huge behavioural issue in the country and paralyzed decision-making. And this problem still persists. Decision making is still a bit of a challenge," said Ashvin Parekh, the managing partner at Ashvin Parekh Advisory Services.

The COVID-19 outbreak has led to the stock market crashing and which in turn would make it difficult for private sector banks to raise capital.

"With the exception of a few, can private sector banks hold large provisions on a particular borrower? They can't. So credit flow is still largely dependent on public-sector banks," Parekh said.

According to Parekh, in the current situation the first problem is with transmission of rates. There's a gap between the Reserve Bank of India's repo rate and what banks offer, Parekh said.

In March, the RBI announced a 75-basis-point cut in the repo rate, bringing it down to 4.4 percent to tackle the coronavirus crisis.

For credit flow to remain smooth, public-sector banks need to be recapitalised adequately or issue a promise of capital, so that the banks are able to provide for the impending surge in NPAs.

"The other issue is to not just to only recapitalise, the government and regulators need to put specific fund related capital. What's a critical sector and what is not, depends on credit flow. Where money will fritter away, will end up with more NPAs. And the problem with NPAs is, a good credit isn't an absolute amount, it has a multiplier effect," Parekh said.

Banks in the country are likely to witness a spike in their non-performing assets ratio by 1.9 percent and credit cost ratios by 130 basis point in 2020, following the economic slowdown on account of Covid-19 crisis, S&P Global Ratings said in its report titled 'For Asia-Pacific Banks, COVID-19 Crisis Could Add $300 Billion To Credit Costs.

The report said that the NPA ratio in India was likely to fare similarly to China's (1.9-2 percent) but the credit costs ratios could be worse, increasing by about 130 basis points.

Apart from a rate cut, the RBI also announced providing Rs 3.74 lakh crore liquidity to banks through reduction in cash reserve ratio, by conducting targeted long term repos operations and by increasing the limit for marginal standing facility to 3 percent.

The RBI also allowed a repayment moratorium for three months on all term loans outstanding as on March 1 to borrowers of all commercial banks, including regional rural banks, small finance banks and local area banks, co-operative banks, and NBFCs, including housing finance companies and micro-finance institutions.