Bad debts of Indian banks will be much worse than provisioning – Quartz India
As the Covid-19 induced the economic downturn is getting worse, Indian banks are preparing for the worst. But what they see as the worst could still be conservative.
In recent months, Indian banks have set aside huge sums of money in anticipation of bad debts, also known as provisioning for non-performing assets (NPA). In the three months ended in June, the country’s largest state bank, the State Bank of India, had provisioned rupee 2,062 crore ($ 270 million), while India’s largest private sector bank, HDFC Bank, had provisioned 1,451 crore rupees.
But analysts believe bad debts could potentially be much larger than the cushion the banks have created so far.
The big problem with the NPA
An account is recognized as non-performing when a borrower is unable to repay his contribution for more than 90 days. Once an account is dubbed NPA, banks must begin the provisioning process.
Over the past six months, many loan accounts have opted for a moratorium proposed by the Reserve Bank of India as relief from the Covid-19 crisis. During the moratorium period, debtors did not have to pay their loan maturities, but banks could not consider them to be inefficient and did not have to fund them.
The six-month moratorium ended August 31, and now, if a company or individual is unable to pay their contributions for more than 90 days, the account will be classified as NPA.
This is when the real problem will start to emerge, analysts believe. “As a result (end of the moratorium), NPAs will start to be recognized from the December quarter,” said Nilesh Shetty, fund manager at Quantum Mutual Fund.
India’s banking system would need an additional 50,000 rupees to fill gaps left by rising NPAs and continue lending, says Mumbai-based credit rating agency India Ratings. Of which public banks are expected to raise Rs 30,000 crore.
Indian banks’ bad loan problems escalate
Sectors such as aviation, hospitality, commercial real estate, and small businesses are struggling with a seizure due to complete or partial cessation within the last six months. This means that new bad debts will emerge from these segments.
Retail loans such as personal, housing, credit cards and microfinance could also turn sour while job losses and wage cuts have multiplied in all sectors. âWhile a large proportion of people working in the informal sector are not banking sector clients, we are already seeing the first signs of job losses and wage cuts in the (taxed) formal economy. This can strain borrowers’ cash flow and weigh on unsecured loans, especially personal loans and credit cards, âwarns Geeta Chugh, analyst at S&P Global Ratings.
Banks will have to raise funds to overcome this crisis.
âThe large private sector banks have been (a) a strong buffer against ANPs and have a better loan disbursement process. In comparison, public banks have poor capital adequacy and depend on the government. Also, their track record is not promising, âsays Shetty. Large private banks have a higher Tier 1 capital ratio – a buffer against risky assets – compared to smaller, state-owned banks.