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The Kerala government’s latest curbs to push back the second wave of the pandemic are likely to affect lenders operating in the state, three banking industry executives said.

The government on 5 May said banks will be allowed to open only three days a week and barred them from any physical loan recovery during the lockdown period.

Following the announcement, Kerala-based CSB Bank on Saturday said it expects a slowdown in recovery in the state, where it had a collection efficiency of 93-94% in April. Banks and non-banking financial companies (NBFCs) say collection efficiency could decline to 75-80% in the first quarter.

“It’s a peculiar state. Everywhere there is a collection problem, but nowhere does the government make a general statement banning banks from recovering the loans. Such a statement by the Kerala chief minister will have an impact on the collection," a top banker said on condition of anonymity.

While the latest measures do not stop banks from online loan collections, cash-based recovery will be hit the most. Bankers expect an extended impact as the lockdown in Kerala, currently on till 16 May, is likely to be extended as the state continues to record more than 40,000 new covid-19 cases every day.

“This year, the first quarter is a complete washout. Last year, we saw that we were allowed to operate by the last week of April and by mid-May, business picked up. This year, we are expecting business to pick up only by July. This is because covid cases in Kerala last year were not as high as this year," the head of a non-bank lender said on condition of anonymity.

Bankers expect business to slow down in other states, too, this quarter. Tamil Nadu and Karnataka have announced 14-day lockdowns till 24 May. Maharashtra is expected to extend its lockdown till the end of May.

“It’s not a prolonged problem, but an intense problem. Customers are holding on to cash. Asset quality will, however, not be impacted as Reserve Bank of India has provided restructuring option for retail and small business borrowers hit by covid," the chief executive of a private sector bank said on condition of anonymity.

That said, banks say that collections will not fall to the 50% levels seen last year as business establishments, such as some manufacturing plants, are still allowed to operate. According to India Ratings and Research, the partial to full lockdowns imposed by various states and Union territories are likely to have a muted impact on the overall business environment. The agency expects corporate performance to remain resilient, backed by strong exports and improved balance sheets in the last six months.

“While supply chain disruptions could play out, the overall impact on corporate credit is expected to be moderate to minimal though stresses are likely to be seen by the MSME and retail borrowers. Ind-Ra expects a build-up of potential stresses in the unsecured lending books of banks and an increase in softer delinquencies in the microfinance institutions segment. The assessment could change if there were to be a stringent national lockdown or a protracted normalization of activities due to the pandemic," the rating company said in a statement on Monday.

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