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How severe is the bad loan shock awaiting Indian banks?

Two key trends — the recent capital raising spree by a clutch of private sector banks and warning by RBI Governor Shaktikanta Das last week — have alerted banking analysts

July 17, 2020 / 05:42 PM IST

How severe will be the bad loan shock awaiting Indian banks once the moratorium period allowed by the Reserve Bank of India (RBI) is lifted? Two key trends — the recent capital raising spree by a clutch of private sector banks and the warning by RBI Governor Shaktikanta Das last week — have alerted banking analysts.

Das asked banks to shore up their capital and tighten risk assessments to face bad times. Most analysts and bankers Moneycontrol spoke to expect an unprecedented spike in non-performing assets (NPAs) in unsecured loans and loans to small companies once the moratorium period is over. RBI granted a six-month loan moratorium to all term loan borrowers to avert a sudden spike in defaults, which ends next month.


How bad will be the shock?“My take is about 5 percent of the total moratorium loans could turn into NPAs,” said Jaikishan Parmar, Analyst at Angel Broking. “The big pain will be seen in loans given to micro, small and medium enterprises (MSMEs) and unsecured loans,” he added.

But there are others who predict worse scenarios. For instance, global rating agency, Standard and Poor’s expects gross NPAs of Indian banks to spike to 14 percent in FY21 from around 8.5 percent in FY20. “The COVID-19 pandemic may set back the recovery of India's banking sector by years, which could hit credit flows and ultimately, the economy," the agency said in a note last month.