Loan defaults take worrying turn
2 min read 12 Oct 2020, 06:54 AM ISTLenders are divided on the repayment delinquency after the moratorium
PremiumLoan defaults in September remained way above the pre-pandemic rates despite the loan moratorium having ended in August, indicating the prevailing economic distress and the continued effect of the six-month moratorium on repayment behaviour.
Repayment bounce data from the National Automated Clearing House (NACH) showed 41% of auto-debit transactions by volume in September have failed against 31% in February.
While the default rate is a tad higher than August, this was the first month after the moratorium and banks were expecting borrowers to start repaying. In value terms, 32% of auto-debit transactions failed in September, same as August but higher than the 25% in February.
These are recurring payments where the borrower has agreed to an auto-debit mandate, and the loan instalments are drawn on a monthly basis from a bank account.
Although the formal moratorium ended on 31 August, many borrowers view the Supreme Court’s recent orders for status quo in downgrading loans as an extension of the moratorium.
The Supreme Court on 3 September ordered an interim stay on classifying bad loans if not declared so by 31 August.
“This is a tad disconnected from our feedback from banks and non-banking financial companies (NBFCs) and may be partly due to stalemate around the Supreme Court verdict. Lenders may need to pursue recoveries; clarity in Q2 results will be key," said a note by Jefferies on 7 October.
To be sure, lenders are divided on the repayment delinquency after the moratorium.
While some believe that there is an uptick in defaults, others said things are gradually going back to pre-covid normalcy.
For instance, analysts at Emkay wrote in a note on 7 October that the managements of non-bank lenders have indicated a sharp revival in collection efficiency by September; however, management commentary on the sustainability of the same is awaited.
In fact, the central bank has filed an affidavit in the Supreme Court, requesting it to lift the stay on bad loan classification as it “shall have huge implications for the banking system, apart from undermining the regulatory mandate of the Reserve Bank of India (RBI)".
Analysts said the data point on auto-debit is significant because it indicates a possible delay in recovery on the ground.
The pandemic and the ensuing lockdown to contain it has left millions jobless and disrupted supply chains, shocks from which the economy is still recovering.
“While commentaries from lenders have pointed towards improving collection efficiency sequentially, elevated bounce rates could entail a higher cost of collections as well as delay any growth recovery," said analysts at Goldman Sachs in a report on 7 October.
It said that the strong positive correlations with credit costs across the board suggests that bounce rates could be a leading indicator for cost of risk.
“We believe elevated zero-day delinquencies would not only keep asset quality under pressure with a high cost of risk in the coming quarters but also limit any sharp revival in retail credit growth. Having said that, in our view, banks with a higher provision coverage ratio vs (compared to) the last downturn are relatively well-positioned to manage non-performing loans (NPLs) in this cycle," the Goldman Sachs report said.
The current level of bad loans in the country is quite elevated, albeit slightly lower than where it was a couple of years ago. Private sector and state-run lenders had an aggregate bad loan burden of ₹8.42 trillion as on 30 June, showed data from Capitaline.
