The year 2021 will be a better year for India’s banking sector as the economy begins to recover from the impact of COVID-19, bankers and analysts said. However, the stress caused by the pandemic will remain on the books for a while until normalcy returns on the ground, they said.
“There will be a statistical jump in growth next year, but it will take time for normalcy to return,” said D K Joshi, Chief Economist at rating agency Crisil, the Indian unit of Standard and Poor’s. “The scars of Covid-19 will not go away for some time. The financial sector will continue to bear the stress,” Joshi, a veteran economist who has been tracking India for decades, told Moneycontrol.
Indian banks escaped a major bad loan shock following the onset of the Covid-10 pandemic after the Reserve Bank of India offered a six-month moratorium for all COVID-linked stressed assets, and subsequently offered a one-time restructuring (OTR) option. Under the OTR, banks can offer up to two years of a moratorium for borrowers hit by COVID-19.
“But, these are only temporary ways to hide the stress,” said the deputy managing director of a major Mumbai-based PSU bank.
“Economic revival is very visible. But there is no end to COVID-19 uncertainty for now. A vaccine may be made available to masses only by June going by the current indications. At least further stress will be contained,” the banker said on condition of anonymity as his bank is in the silent period.
Indian banks had gross bad loans of around Rs 8-Rs 9 lakh crore at the end of the September quarter. But, the RBI expects the NPAs to worsen to close to 15 per cent of bank loans by March 2021 if the economy doesn’t revive and in a worst-case scenario. However, an early recovery could lessen the Covid impact.
The central bank expects the country’s GDP to contract by 7.5 per cent in the current fiscal, but this is better than the 9.5 per cent contraction projected earlier. India’s GDP contracted by 7.5 percent in the July-September quarter, compared with a record contraction of 23.9 per cent in the June quarter.
Banking sector performance is directly impacted by economic growth activity on the ground as cash flows of companies and individual borrowers depend on how the economy performs. In a slowing economy, the likelihood of loan defaults is high.
Poor demand, risk aversion to hurt
As things stand, banks are flush with liquidity and lending rates have come down significantly, but loan growth has not picked up. This is because demand remains low on the ground due to the lacklustre economic scenario.
On a year-on-year basis, non-food bank credit growth decelerated to 5.6 per cent in October 2020 from 8.3 per cent in October 2019. Credit to industry contracted by 1.7 per cent in October 2020 as compared with 3.4 per cent growth in October 2019, mainly on the back of contraction in credit to large industries by 2.9 per cent in October 2020 (4.2 per cent growth a year ago), though the credit to medium industries registered a robust growth of 16.7 per cent in October 2020 (1.2 per cent a year ago), the latest RBI data shows.
Analysts said the pain is likely to be on the retail side rather than corporate, where most of the stress is already factored in.
“Pain is likely to be on the retail side compared with the corporate book. On the corporate side, we have seen cash flows improving compared with early in the Covid phase,” said Binod Modi, Head-strategy at Reliance Securities.
“Also, most of the corporate NPAs are recognized. On the other hand, job losses and general adverse economic sentiments continue to put pressure on retail loans, especially unsecured loans,” he said.
Last week, following the Monetary Policy Committee (MPC) meeting, RBI Governor Shaktikanta Das said he is optimistic that there is a recovery in both rural and urban segments, but sustaining this will need policy handholding. This essentially meant that there is still no confidence on the part of the central bank about the growth situation.
NPA no big worry, but credit growth a concern
Most analysts harp on the fact that much of the corporate NPAs are already recognized. Also, the one-time recast is a big relief both for banks and stressed borrowers as immediate pain is avoided, but the real challenge will be to find good quality borrowers.
“There is enough money with banks. Liquidity is no longer an issue. Where we have a problem is finding good room for credit,” said the banker quoted earlier, adding that COVID-19 remains the big challenge for the banking sector next year. The sooner a vaccine is made available to the masses, the quicker the sector will return to normalcy.
Some positive signs
Banks have in fact already indicated that there are some signs of recovery. For instance, most banks which have reported second-quarter results have said that they have seen very few requests from borrowers for OTR.
Also, some banks like ICICI Bank have seen a big pick-up in home loan sales in September-October. The bank's mortgage loan portfolio has crossed Rs 2 lakh crore, it said.
“We have seen a resurgence in demand for home buying,” said Anup Bagchi, Executive Director of ICICI Bank in a conference call with reporters on November 11. The numbers are substantially more than September, Bagchi said, adding, the bank is aiming to ramp up its digital channels for business and the process is already underway. Part of the growth is due to the affordability of homes, Bagchi said.
Still, it is too early to conclude that a sustainable recovery is in place. Analysts are waiting for Q3 numbers for better clarity.