MUMBAI: With more than 30% of the retail book under moratorium across the banking system, lenders may face their biggest recovery challenge in retail loans on the expiry of the blanket loan moratorium on 31 August.
While the retail segment has been for long considered a safer bet for banks and non banking finance companies (NBFCs) compared to the wholesale corporate segment given the wider distribution of risk, the odds have changed significantly since the lockdown from March 25.
Lenders fear that a spike in defaults may begin from September due to likely fall in household income during this period and the uncertainty ahead.
“A large number of retail borrowers are in financial distress and collections especially from 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 senior banker, an executive director at a public sector bank.
Currently, home loans accounting for over half of all retail loans stood at ₹13.3 trillion as on 24 April. In its Report on Trend and Progress of Banking in India in December, RBI had cautioned that while banks have oriented their lending towards the relatively stress-free retail, the slowdown in private consumption spending has imposed limits to this growth strategy even as the possibility of defaults among retail segments rises.
Some banks are already seeing some stress in their retail portfolios. Private sector lender IDBI Bank, which is traditionally tilted towards corporate loans, is also seeing delay in repayments by retail customers. Ajay Sharma, executive director and chief financial officer, IDBI Bank said in March, due to the lockdown, repayments were not forthcoming, especially in the retail segment.
However, Sharma added that 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 a surplus cash with them but chose to defer repayments out of abundant 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 the end of moratorium 2.0 on how the underlying loan book will behave," said Uday Kotak, speaking at the Confederation of Indian Industry (CII) Annual Session 2020 on 2 June.
Given the situation, most lenders remain on a wait and watch mode. While, the percentage of retail borrowers who have opted for moratorium is not too different from corporate borrowers but while banks may be able recast debt corporate loans, retail borrowers are unlikely to get that benefit feel industry watchers . The problem may be further aggravated in case of non banking lenders, which have been granted a six-month moratorium to their customers but haven't got any deferment benefit from their own lenders, mainly banks.