Is COVID-19 impact on banking sector exaggerated?

Trade

• Watchlist
• Portfolio
• Message
• Set Alert

 

 

Choose Stock Exchange: BSE LIVE NSE LIVE

26 Aug, 2025 12:21

Volume

Todays L/H

More

×

Is the Indian banking sector recovering from the impact of COVID-19 sooner than initially expected? There are a few recent data points worth looking at.

On Wednesday, the Reserve Bank of India’s study said Indian economy could return to positive growth in Q3, a quarter earlier than initially. To be sure, the RBI said its Economic Activity Index estimates GDP growth at negative 8.6 percent in Q2, suggesting a contraction. This is still lower than the contraction projected in the October policy at negative 9.8 percent. And the RBI study talks about a likely recovery in Q3. Economic recovery is directly linked to asset quality of banks. When cash flows of companies improve, they employ people and resume repayments to banks. Projects that are on hold will be back on track.

Secondly, in a research report, State Bank of India’s economists said the fear of huge spike in bad loans for the banking sector could be unfounded. Incoming data suggests that only very few applications have come to banks for loan restructuring so far. Only about Rs 1 lakh crore of corporate loans could go for restructuring compared with Rs 7 lakh crore estimated earlier. The RBI’s NPA estimates could be an exaggeration and most of the past estimates have gone wrong, the SBI report said.

“It is now apparent that the big fear of large slippage in asset quality of banks is unfounded with Indian banks guiding at much lower credit cost than even their Asian counterparts! As far as our understanding goes, very few of the borrowers have till date applied for restructuring and incrementally such borrowers are likely to be much lower,” the SBI report said.

That’s not all. On Wednesday, ICICI Bank said it managed to do record home loan sales in October and crossed Rs 2 lakh crore mortgage portfolio. In a conference call with reporters, ICICI Bank management said there is a resurgence seen on the demand for home loans.

Many banks have reported that there are only ‘very few’ applications so far restructuring or ‘an insignificant number’ to report. Most banks have already set aside extra provisions to cover the likely impact and almost all of them have seen regular growth trends in their retail loan portfolios.

According to CARE rating agency, during September 2020, the retail segment registered a growth of 9.2 percent in September 2020 on a Y-o-Y basis and accounted for 28.2 percent share of the total credit during the period as compared to 27.3 percent during the period one year ago.

The GNPA ratio of SCBs improved to 7.7 percent in the quarter ended September 20 against 9.3 percent in the year-ago period and 8.2 percent in the June-end quarter which was largely driven by PSBs, CARE said. On an overall basis, PSBs accounting for about 75 percent share of GNPAs of SCBs have experienced a drop in the GNPA ratio to 9.3 percent in the quarter ended September 20 against 11.6 percent in the year-ago period and 9.8 percent in the June 20 quarter.

This is largely because of recoveries, CARE said.

To be sure, these are early projections and could be misleading. An actual picture of the restructuring loan accounts could emerge only by December, banking analysts say. But if the growth momentum continues across sectors, banks could be looking at a lower damage due to the pandemic than initially expected by the analysts.  More numbers are awaited but, for now, there are indications that the COVID impact could be less severe than expected.