Banks fear second wave of defaults as curbs begin to bite

Banks, bruised by the pandemic last year, are bracing for more pain as the second wave of the pandemic threatens to raise loan default rates and worsen asset quality.

Bankers fear the lockdown-like curbs, including curfews, travel restrictions and mall shutdowns, are likely to hurt borrowers, triggering a second wave of defaults. Without a repayment moratorium like the one announced by the Reserve Bank of India (RBI) last year, the defaults are likely to pinch banks harder.

The Centre’s reluctance to bear the ₹7,000 crore compound interest waiver bill will further burden banks. The apex court in March directed banks to waive compound interest on loans for all borrowers between March and August. Lockdowns in Maharashtra are likely to hit banks as nearly a quarter of all bank loans have been made to individuals and businesses in the state. As on 31 March 2020, India’s most industrialized state accounted for 24% of loans from commercial banks.

In a meeting with RBI governor Shaktikanta Das on Monday, bank chiefs sought an extension of the one-time debt recast scheme announced last year, said a person aware of the development.

Although it is too early to predict the bad loan situation, another round of curbs will hurt small businesses more, a senior banker said on condition of anonymity. “Small businesses were terribly hit last year, and if there are more lockdowns, they will again be at the receiving end. I think the government is aware of the issues and will avoid any blanket ban on movement,” he said. To be sure, the impact on small businesses was cushioned by a sovereign-guaranteed loan scheme announced last year.

Another banker said as long as there is free movement of goods, the impact on businesses is likely to be tolerable. As India grapples with a second and a fiercer onslaught of the coronavirus, the nascent recovery in the economy is also at stake. Much like the previous bout of the pandemic, retail loans are expected to experience more stress than corporate loans, said the banker.

Rating agency Fitch said more than 80% of new infections are in six prominent states that account for roughly 45% of banking sector loans. The operating environment for banks, Fitch said, will most likely remain challenging and the second wave could dent the sluggish recovery in consumer and corporate confidence, and further suppress banks’ prospects for new business.

“There are also asset quality concerns as banks’ financial results are yet to fully factor in the first wave’s impact and the stringent 2020 lockdown due to the forbearances in place,” Fitch said on 9 April.

India’s bad loan problems are likely to worsen, with the existing ₹7.38 trillion stockpile set to expand in the coming months. Rating agency Icra estimates 9.6-9.7% of bank loans would have turned bad in FY21.

The second wave also puts bankers at risk. Around 600 bank staff died during the pandemic, data from the Indian Banks’ Association showed.

Gopika Gopakumar contributed to the story.