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With over 30% of the retail book under moratorium across the banking system, lenders may face a massive challenge recovering retail loans on the expiry of moratorium on 31 August.

The retail segment has long been considered a safer bet for banks and non-banking financial companies (NBFCs) than the wholesale corporate segment, given the wider distribution of risk. But the odds have changed significantly since the lockdown from 25 March. Lenders fear a spike in defaults may start from September due to a likely fall in household incomes amid uncertainties.

“A large number of retail borrowers are in financial distress and collections, especially for home loans, are expected to be affected in a major way because many borrowers may find it tough to repay large equated monthly instalments (EMIs)," said a an executive director of a public sector bank.

Home loans, accounting for over half of all retail loans, stood at 13.3 trillion on 24 April. In its Report on Trend and Progress of Banking in India in December, the Reserve Bank of India has cautioned that while banks have oriented their lending toward the relatively stress-free retail, the slowdown in private consumption spending has imposed limits to this growth strategy as the possibility of defaults among retail segment rises.

Some banks are already seeing stress in their retail portfolios. Private sector lender IDBI Bank which has traditionally tilted toward corporate loans is also seeing delays in repayments by retail customers. Ajay Sharma, executive director and chief financial officer, IDBI Bank said that repayments dried up in March, especially in retail segment.

Sharma said borrowers also seem to be conserving cash instead of choosing to repay. The bank has 68% of its retail borrowers under moratorium and almost half of these borrowers have conveyed that they have surplus cash but have chosen to defer repayments out of caution.

“Small-ticket lending is linked to risk pricing and risk adjusted returns. It’s been extremely difficult over the last 30-40 days with the ability of collections. In that context, the true picture will come at theend of moratorium 2.0 on how the underlying loan book will behave," said Uday Kotak, managing director, Kotak Mahindra Bank, speaking at the Confederation of Indian Industry (CII) Annual Session 2020 on 2 June.

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