With the RBI's and government's relief measures for creditors, banks will have to deal with loan repayment defaults and delays
Reforms do not necessarily translate to good news. At least that is how banks in India will be feeling after RBI Governor Shaktikanta Das (picture above) announced an extension of the existing moratorium on repayment of loans to banks, and Finance Minister Nirmala Sitharaman announced that fresh proceedings under the Insolvency and Bankruptcy Code (IBC) have been suspended for a year.
Due to the nationwide lockdown, business activity and cash flows for corporates have been severely disrupted, as have salaries for individuals, which has impacted their ability to repay loans. The RBI has extended the existing moratorium on loan repayment by a further 180 days to August 31, which will definitely be a relief for borrowers. But, in an environment where asset quality concerns and high provisioning have hurt profitability of banks, such an extension will only spell more bad news for them.
More indebtedness
“The longer the time of the moratorium, the higher is the indebtedness in the system,” says Saswata Guha, director of financial institutions at Fitch Ratings in India. What is completely uncertain at the moment is whether these borrowers will be in a position to pay back the banks. This will, of course, depend on their financial position and the security of their jobs and businesses, and the state of the economy.
India’s economic growth has continued to weaken in recent years, rising by just 3.1 percent for the quarter ended March, its lowest since January-March of 2009, when it stood at 5.8 percent. Several macro-economic data points announced since then—including the April manufacturing and services PMI—show sharp declines.
Bank credit to various sectors has been growing in recent years. But, by their very nature, unsecured personal loans are the riskiest of products, and there is little certainty of how much of this money will flow back to banks. Crisil has already estimated that the non-performing assets (NPAs) of banks are set to rise by 150 to 200 basis points this fiscal year.