The second
wave of Covid-
19 has
worsened the
bad loan crisis
at Indian banks
There seems to be no end to the bad loan problem for
India’s finance industry.
Banks and non-banking financial companies (NBFCs) in
India have been accounting for non-performing assets
(NPA)—loans where repayment installment has not been
made for over 90 days since the due date—for several
years now, mainly because some large business tycoons
either defaulted or defrauded the system. But now, the
problem is becoming more widespread as regular Indians
are struggling to repay loans due to the Covid-induced
slowdown in small and medium businesses, and job losses.
In April-June this year, many borrowers could not repay
banks because the deadly second-wave of Covid-19 dented
businesses and jobs further, and increased the healthcare
costs of families. As a result, many financial institutions
were forced to set aside “provisions,” which ate into their
quarterly profits.
“This time, the bad loan crisis had widened. People at (the)
ground level were hit more and death rate was much
higher,” said Asutosh Mishra, head of research for
institutional equity at Ashika Stock Broking. “Entire
operations in the banking industry were hit badly. In the
micro-finance institution (MFI) segment, gold loans, and
commercial vehicle loans were affected the most because
customer touchpoint is very important here…non-
housing retail loans were also affected. Many employees of
these banks and NBFCs had also contracted Covid.”
Non-performing assets at Indian
banks
Public sector banks earmarked more than 60% of their
aggregate operating profits in the June quarter as
provisions, a major chunk of which is for loan losses and
restructured assets, according to a report in the Financial
Express newspaper. Setting aside provision helps banks to
recognise a loss on the loan ahead of time, and uses their
capital to absorb these defaults.
India’s largest lender, the government-owned State Bank of
India (SBI), made a provision of Rs10,052 crores ($1.35
billion), which means it expects over 1.7% of its total loans
to go bad.
In the quarter ended June, India’s largest private sector
bank made a provision of Rs4,831 crores for bad loans, the
highest since the onset of the Covid-19 pandemic,
signalling that it expects its lenders to struggle with
repayment in the coming months.
The situation at non-banking lenders and microfinance
institutions, which provide loans and other financial
services to poorer sections of society, is even more
worrisome.
Bad loans at non-banking
lenders in India
During the second wave of Covid-19 in April and May,
infections in rural and semi-urban areas intensified much
more than in the first wave last year. This, together with
continuous stress in urban markets would lead to higher
bad debt and impairment costs for NBFCs, Fitch Ratings
said in a report in July.
“…prolonged asset quality challenges would constrict their
(large non-banking financial institutions) funding. Smaller
NBFIs, particularly microfinance, and unsecured lenders
with regional portfolios could face greater funding strains,”
Fitch said.
When will India’s banking sector
recover?
Most experts believe there will be a continued strain on
lenders’ asset quality in the coming quarters given the
expectations of an impending third wave of Covid-19,
which may further hit the collection and recoveries across
portfolios and geographies in India.
The NPAs of scheduled commercial banks are expected
to rise to 9.8% by March 2022 (pdf) under the baseline
scenario, as against 7.5% as of March 2021, the RBI said in
its latest Financial Stability report released in March.
The recent second wave of coronavirus cases will continue
to exert near-term pressure on India’s non-bank financial
institutions, said Fitch Ratings. “The recovery in the
September quarter is likely to be gradual as states reopen
cautiously to prevent a third wave of infections amid an
uneven vaccination rollout,” it said.
Many analysts believe that banks may need to improve the
provision coverage ratio in the upcoming quarters to
cushion against a possible rise in bad loans. Continued
policy support and strong loss-absorbing buffers will help to
mitigate the negative impact of deteriorating asset quality,
according to rating agency Moody’s.