COVID-19 has brought the entire economy to a standstill. Logically, the financial sector felt the heat. In fact, banks would have seen a bigger shock sans the emergency relief measures announced by the Reserve Bank of India (RBI) and government during the onslaught of COVID-19.
Seven to eight months after the pandemic hit the economy, is the impact of COVID-19 slowly receding from the financial sector? There are some positive signs that probably indicate that financial institutions are getting some relief in terms of improving business conditions.
1) On December 8, rating agency Icra said non-banks, including infrastructure lenders and housing finance companies, have witnessed a good improvement in the collection efficiency since September 2020 after post -COVID-19 disruptions in Q1.
The credit profile is supported by a steady improvement in credit provisions over the last few quarters; and moderately reduced the non-performing assets (NPAs) in the quarter ended September 2020, the agency said.
2) Most banks which have reported second quarter earnings, have suggested that they have received very few credit recast requests than originally estimated under the RBI’s one-time loan restructuring scheme. This trend was reported across private and public sector banks. Similarly, there is a significant downward trend in the number of borrowers who opted for moratorium in the second round, indicating that level of stress is easing among borrowers.
3) Microfinance institutions too have seen a pick-up in business since September. Repayment rates or collection rates have returned to 80-85 percent in September compared with 90-95 percent pre-COVID, said P Satish, executive director of Sa-Dhan, an industry lobby of microlenders. “The reports we get from across the states indicate that collection rates have picked up substantially. We saw around 85 percent in September, which is higher than around 70 percent in August,” said Satish.
Similarly, August-September saw an uptick in disbursement rates as well in the microlending industry. On an average, microlenders used to disburse Rs 17,000 to Rs 20,000 crore. After falling to extremely low levels, in the March quarter, disbursement levels have improved to around Rs 13,000 crore monthly average in September. “There is a clear trend of disbursements picking up in some pockets as customers are returning to their normal lives,” said Satish.
4) In a research report, State Bank of India’s economists said the fear of a 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.
5) Some banks, like ICICI Bank, have seen a good pick-up in their retail business in September-October. 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.
6) The Gross NPA 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.
These are, of course, early trends and may not give us a conclusive pattern. One needs to wait for a few more quarters to get a definite trend.