Further shocks will deliver a big blow to lending institutions2 min read . Updated: 01 Sep 2020, 07:25 AM IST
- Banks may see bad loans rise to the highest in 20 years
- There are concerns that credit growth, which has been hovering in the 5-6% range, could decline further
MUMBAI : The ability of borrowers to repay loans is expected to decline if the economy continues to contract in the coming quarters, casting a cloud over asset quality of banks which have seen little growth in new business.
For domestic banks, which may see bad loans surge to the highest in 20 years, the Reserve Bank of India’s (RBI) new debt recast window will help soften the blow. But senior bankers have called for an early solution, given that at least ₹5.7 trillion worth of bad loans remain outside its ambit. A worsening economy will also discourage borrowers from taking fresh liabilities.
While lenders may already discount the first quarter GDP numbers which are on expected lines, they said that future shocks could deal a body blow to many. “The Q1 GDP data is anyway for the past period for which we have seen how borrowers are performing. However, if this downward trend continues, it will impact both the demand for new loans and their ability to repay, leading to a pile-up of stressed assets," said a banker at a private sector bank.
The banker said that it is to be seen whether the maximum repayment period elongation of two years under RBI’s recast window will be effective if the slowdown remains as bad. “People may take more to recover instead of this two-year outer limit prescribed by RBI, and such borrowers may require deeper recasts with larger haircuts for lenders," the banker cited above said on condition of anonymity.
There are concerns that credit growth which has been hovering in the 5-6% range for the past few months could decline further, tracking the pace of economic slowdown.
“The growth in credit has come off already and it is also to do with the fact that economic activity is on the lower side post covid-19. The nominal GDP growth has also come in negative and credit growth has always been in line (with it) in the last decade or so," said Sameer Narang, chief economist, Bank of Baroda.
Narang said that right now, credit growth is holding up despite such low economic activity, but the fact is that it is also unlikely to pick up in a hurry.
“Retail (growth) which was driving credit growth has declined in the last few months," added Narang.
Narang also believes that RBI’s debt recast window will save several retail and corporate borrowers. “In personal loans, there will be some recast and certain segments that have been impacted more will see greater number of requests. It is very difficult to assess what the quantum will be. Among large corporates, some segments will definitely require debt recast," said Narang.
However, there is a fair chance that about half of all the debt recasts slip back into the non-performing asset (NPA) category in the coming years. The erstwhile corporate debt restructuring (CDR) framework had very little success in turning around companies. When the CDR scheme was wound up in 2018, 17 years after it came into existence, it had approved debt recast of ₹4 trillion, of which only ₹84,677 crore of assets saw a turnaround. A repeat of this would lead to another cycle of bad loans that lenders are just emerging from.