Will the second wave of COVID, new state-level restrictions, add to the NPA’s banking problems?

The RBI announced a six-month deferment and a one-time restructuring for banks. This helped in avoiding huge increase in their non-performing assets (NPAs). A loan becomes an NPA if interest or principal is not repaid for a period of 90 days.

The time when the Indian economy was trying to take out its second wind after the lockdown 2020 attack comes in an unexpected but severe second round of the epidemic.

Maharashtra on Tuesday announced a 15-day curfew in the state to control the spread of COVID-19 infection. There is a possibility of more states following suit. How will the latest round of sanctions affect the economy and, in particular, the asset quality of the banking sector?

Logically, banks, non-banking finance companies (NBFCs) and microleaders may see continued tensions on the quality of their asset front due to the second wave of COVIDs and fresh restrictions, but consensus among analysts is that in the banking sector Incremental stress may occur in 2020 will not be as large compared to the last round of the pandemic.

Last year, when the Center announced a nationwide lockout to fight COVID-19, banks were under great pressure on the quality of their assets and renewed acquisitions. But the real impact on asset quality was not much to prevent immediate trauma due to the timely intervention of the central bank.

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The RBI announced a six-month deferment and a one-time restructuring for banks. This helped in avoiding huge increase in their non-performing assets (NPAs). A loan becomes an NPA if interest or principal is not repaid for a period of 90 days. Once a loan becomes an NPA, banks are required to put money aside from such accounts to cover potential losses. Higher provisions hurt the profitability of banks.

Siddharth Purohit, senior research analyst at SMC Global Securities, said that if the second wave of infection continues to impose more restrictions on business activities, banks headwind on the quality of their assets, but the impact will not be severe.

“There may be more restrictions. But even last time, the effect was not very large. Therefore, one should not worry too much regarding stress in property.

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Rating agency Moody’s views are similar. It also marked risks to the economy due to the latest COVID infection. The rating agency stated, “The second wave of infection presents a risk to our growth forecast as restructuring of virus management measures will curb economic activity and may harm market and consumer sentiment.”

It cited data from Google Mobility that there was a 25 percent drop in retail and entertainment activities across India as of 7 April compared to 24 February. “This was shown in the Reserve Bank of India’s March Consumer Confidence Survey, which showed a drop in perceptions. Expecting economic conditions and a reduction in spending on nonprofits,” said Moody’s.

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However, attention has been given to “ micro-control areas ” to deal with the current wave of infection, as opposed to a nationwide lockdown, which we expect will have a less severe impact on economic activity than in 2020, the rating agency said. Pointed out.

Last year, the outbreak of COVID-19 added to concerns of an already slowing economy. In this financial year, the Indian economy is projected to bounce back to the lower base of the previous year. In FY 2011, growth is projected to increase. growth percentage.

On Monday, the agency S&P Global Ratings (a division of Standard & Poor’s Global) said systemic risk in Indian banks is likely to remain high in the wake of the second wave of COVID-19 and higher ratios of weak loans.

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S&P estimates weak lending in banks at 11–12 percent of gross loans. S&P predicted, “We forecast that in the year ending 31 March 2022, the total debt would decline by 2.2 per cent and in FY 2023 to 1.8 per cent.

In the final round, banks reported fewer requests for repurchase of loans as most companies applied for a loan moratorium. The government last year imposed a freeze on new Insolvency and Bankruptcy Code (IBC) cases for a period of 12 months to help the borrowers in the grip of the covid-19 epidemic. This means a sharp decline in fresh IBC cases, but the deadline expired on 25 March.

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According to a recent report by the CARE rating agency, banks have already managed to recover approximately 40 percent of their arrears in 12 major cases, ten of which have reached the resolution stage.

“For the past two years, NPA levels have plummeted (partly due to loan write-offs) and the challenge for banks has continued in the current year due to epidemics and nationwide lockouts, resulting in silent economic activities across the country. Huh.” The CARE report states.

Indian banks have seen a significant increase in NPA following the early identification of stressed assets and asset quality review (AQR) by the Reserve Bank of India. This forced banks to take out the dirt hidden in their balance sheets.

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The report states that there has been a sharp increase in NPAs. But the NPA began declining in the last two years due to significant debt write-offs and higher provisioning. The provisions refer to funds earmarked against NPA losses.

On the whole, there was an improvement in Gross NPAs in FY18 and Gross Domestic Product (GDP) in FY18, which had ended in FY18 respectively.

MFIs can see more pain

Rating agency Crisil said that microfinance institutions (MFIs) or small microlenders may face more trouble on the ground due to the fresh restrictions due to the nature of their business as compared to the big banks.

Microleaders, as the name suggests, offer small loans to low-income borrowers. MFIs typically borrow from banks and lend to their borrowers at a margin of 10–12 percent of their borrowing costs.

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According to the agency, Maharashtra also ranks among the top five states in terms of microfinance loans, with assets under management (AUM) of around Rs 16,700 crore as of December 2020, which is about 7 per cent of all microfinance loans.

Crisil said that due to the previous extended lockdown, the collection efficiency in Maharashtra has come down to around 85-90 per cent. The all-India average storage efficiency in December 2020 was 90–94 percent.

Krishnan Sitharaman, Senior Director and Deputy Chief Rating Officer, CRISIL Ratings: “The sector’s collection efficiency has stalled at 90–94 percent as compared to the pre-epidemic level of 98–99 percent in the last few months. These mini-lockdowns may restrict improvements in the coming months. “

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However, the NBFC-MFI has been allowed to continue operations in Maharashtra, in contrast to the most stringent lockdown phase at the beginning of the last financial year. Since microfinance requires high personal contact, it is a great relief.

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