Banks Prepare for Bad Loan Problems for Pandemic Affected Companies, Muted Credit Growth, Auto News, ET Auto
By Kumar Dipankar
New Delhi: Tackling nonperforming assets will be a major challenge for the banking sector in the new year as many companies MSME sector, may not be able to withstand the heat of the coronavirus pandemic which has led to a historic contraction of the economy in the first half of the current fiscal year.
In addition, weak private investment impacting the growth of business loans will be another challenge that banks will face in the coming months. Despite abundant liquidity in the system, demand from the corporate sector is very low and bankers are hopeful that a faster than expected recovery might bring the animal spirit to India Inc.
Although the Indian economy has seen a strong recovery from a contraction of 23.9% in the first quarter to a contraction of 7.5% in the second quarter, it has yet to boost sentiment in India Inc. In recent years, private investment has been weak while public spending does most of the work for the economy.
As for the banking sector, the outbreak of the pandemic in early 2020 largely shaped business and operations for most of the year.
The legacy of rising NPAs (non-performing assets) continued to plague the banking sector and the first major shock came in March with the Reserve Bank of India (RBI) imposing moratorium on the Yes Bank, then hit by the crisis.
By the time the Yes Bank issue was resolved, the country was in the throes of the COVID-19 pandemic, leading to a nationwide lockdown and even the budget session of Parliament had to be shortened.
However, the government has not postponed the process of merging six public sector banks into four benchmark lenders to create world-class institutions to meet the goal of a $ 5 trillion economy by now. March 2025.
On April 1, United Bank of India and Oriental Bank of Commerce merged with Punjab National Bank, making it the second largest public sector bank (PSB).
Likewise, Andhra Bank and Corporation Bank merged with the Bombay-based Union Bank of India. Syndicate Bank merged with Canara Bank while Allahabad Bank merged with Indian Bank, based in Chennai.
“The merger has almost stabilized … It has proceeded very transparently despite the lockdown and the first positive signs of the merger are now also visible,” said Financial Services Secretary Debasish Panda.
“They now have a larger capital base and their ability to lend has increased, and then you have complementary products from the different banks that have merged with the lead banks,” he said.
To provide relief to millions of borrowers who faced a disruption in their income due to the foreclosure, the banks, under the leadership of the RBI, extended the moratorium by six months until August.
As a result, the recognition of NPAs was put on hold during the period and, subsequently, the Supreme Court put an end to the new recognition of NPAs until further orders.
On instruction from the Supreme Court, banks have been asked to waive the compound interest portion of loans up to Rs 2 crore for the six-month moratorium period starting March 1, 2020.
Over 40 percent of the system’s credit and 75 percent of borrowers have benefited from the decision and this has also resulted in an additional charge of around Rs 7,500 crore on the government.
For adults companies, the banks, under the leadership of RBI, implemented a one-off loan restructuring according to strict parameters. Firms in difficulty had time until December to take advantage of the program.
Regarding the issue of no credit check loans drawdown, the core business of banks, it remained muted for most of the year. However, the disbursement of agricultural and retail loans accelerates considerably from September.
“We have seen that there is a constant increase in the credit growth. Retail lending, housing lending and agricultural lending have resumed and MSMEs, again, with government intervention through ECGLS and other similar programs, have also resumed, ”said Panda.
There is moderate growth in the business segment, he said, adding that banks and government are working together to revive demand for business loans and that recently ECGLS has been extended to more sectors. in trouble.
Under the Emergency Credit Line Guarantee Scheme (ECLGS), banks sanctioned loans worth Rs 2.05 lakh crore to 81 lakh MSME which were affected by the disruption caused by the pandemic .
Coming to the disturbing part, the jury is still out on the trajectory of bad loans. One school of thought is that NPAs are bound to rise largely because of MSMEs, but bankers and policymakers are not that pessimistic.
According to the Financial Stability Report (FSR) released by RBI in July, gross NPAs of all banks could rise to 12.5% by the end of this fiscal year in the baseline scenario, from 8.5% in March 2020.
In the baseline scenarios, the GNPA ratio of public banks could drop from 11.3% in March 2020 to 15.2% by March 2021. The GNPA ratio of private and foreign banks could drop from 4.2% and 2.3% to 7.3%. percent and 3.9 percent, respectively, over the same period.
However, due to a faster than expected recovery, there is also a recovery in the banking sector and most banks, including private sector lenders, recorded good profits in the July-September quarter. This is mainly due to cash income and the reduction in NPAs.
“We don’t expect a major shock to hit public sector banks next year given the high provision coverage ratio, the steady decline in non-performing assets (NPAs) and one-off corporate restructuring, among others.” , said Panda.
On the financial health of the banks, Panda said 11 out of 12 public sector banks reported profits in the last quarter. Even gross NPAs have dropped significantly and the provision coverage ratio has increased, he added.
To cushion future shocks, the secretary said public sector banks had raised Rs 40,000 crore in the form of stocks, and bonds and another Rs 25,000 crore would be raised in the next three months.
In addition, the government has allocated Rs 20,000 crore for capital injection into PSBs during the current fiscal year. Of this amount, the Ministry of Finance granted Rs 5,500 crore to Punjab & Sind Bank to meet regulatory requirements. DP CS RAM MKJ