Covid hit Indian banks harder than peers in US, Europe: RBI

  • While all countries saw a year on year increase in the default rate among both corporate and retail borrowers in the fourth quarter of last fiscal year, it has been more pronounced in the case of Indian banks

Gopika Gopakumar
Updated3 Jul 2021, 05:28 AM IST
RBI’s FSR collated the median and adjusted default rates in the retail and corporate portfolio of banks across 7 major economies including India.
RBI’s FSR collated the median and adjusted default rates in the retail and corporate portfolio of banks across 7 major economies including India.

Banks in India have seen the worst deterioration in asset quality owing to the covid-19 pandemic compared to other advanced economies, show data released by Reserve Bank of India’s financial stability report.

While all countries saw a year-on-year increase in the default rate among both corporate and retail borrowers during the fourth quarter of CY20, it has been more pronounced in the case of banks operating in India.

Even in terms of expected default in the corporate portfolio, as measured at the end of Q4CY20, Indian banks fared the worst with adjusted probability of default at 3.94 compared to 2.88 IN Q4CY19

The report collated the median and adjusted default rates in the retail and corporate portfolios of banks across seven major economies.

According to the report, the median or weighted average default rate in the corporate portfolio of Indian banks spiked to 2.86 at the end of Q4CY20 from 1.55 in Q4CY19. In comparison, the US saw the median default rate in the corporate portfolio at 1.13 compared to 0.62 in the year-ago period. On the other hand, European banks reported an improvement in the corporate median default rates despite covid.

Even in terms of expected default in the corporate portfolio, as measured at the end of Q4CY20, Indian banks fared the worst with adjusted probability of default at 3.94 compared to 2.88 IN Q4CY19.

Much of the default in the corporate portfolio was led by small and medium enterprises, the RBI report said.

Retail loans were the most affected as lockdowns and other restrictions led to job losses and a decline in loan repayments. The performance of the retail portfolio deteriorated in five of the seven countries, with India seeing the sharpest increase in default rates.

According to the report, the median default rate observed in the retail loan book of Indian banks stood at 2.17 at the end of the fourth quarter of CY20 compared to 0.22 IN Q4CY19. Much of the impairment in retail loans was driven by secured real estate assets and unsecured exposure. The highest default rate was seen in the retail loan book of banks based in Italy at 4.17 at the end of Q4CY20 compared to 4.63 in Q4CY19.

Other countries such as the US saw the median default rate at 1.29 in the retail loan portfolio compared to 1.06 in the year-ago period.

Experts said Indian retail borrowers were possibly the worst-affected, compared to other advanced economies, due to the poor fiscal spending to support them in the wake of the pandemic.

For instance, the UK government introduced the furlough scheme in 2020 to stop people from being laid off by their employers during the lockdown. The government paid 80% of the wages of people who could not work, or whose employers could no longer afford to pay them, up to a monthly limit of £2,500.

While India offered regulatory forbearance such as the six-month loan repayment moratorium for borrowers and introduced credit-guarantee schemes for small and medium enterprises, it failed to put cash directly in the hands of consumers, said experts.

That said, the jury is still out whether the short-term approach adopted by other countries proved more beneficial as compared to the long-term cautious approach by Indian regulators.

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First Published:3 Jul 2021, 05:28 AM IST
HomeEconomyCovid hit Indian banks harder than peers in US, Europe: RBI

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