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The odds of a sharp rise in fresh bad loans for India’s banks have increased with regional lockdowns in several states in response to the second wave of covid-19 infections. However, this time around, lenders won’t have the cover of forbearance as the judicial standstill on asset recognition has been removed.

What’s more is that the Reserve Bank of India (RBI) is not keen on giving another bout of moratorium relief to borrowers. RBI governor Shaktikanta Das on Wednesday sounded non-committal when asked about the moratorium in a virtual media interaction. “Moratorium is a standard operating tool," he said adding that the situation may require more unconventional measures.

That means, for now, every default will be counted as a delinquency, adding to the headline gross bad loan number for banks.

RBI had predicted gross bad loans to rise to 13.5% by September in its December 2020 financial stability report, but the swift recovery in several high frequency economic indicators had allayed concerns on asset quality somewhat. With firms small and big back in business, repayment capacities are expected to be getting stronger.

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No cover-up

However, with the second wave leading to the threat of an increase in the number of regional lockdowns, analysts are getting worried on the potential impact on asset quality. “We remain watchful of commentary given the rising covid-19 cases and fear of a lockdown in key districts," analysts at Motilal Oswal Financial Services Ltd wrote in a note.

Analysts are not expecting gross bad loan ratios for banks to jump to double digits as the RBI’s report did. Icra Ltd puts the ratio at 9.5-9.7% as of March-end, lower than RBI’s estimate of 12.5% for the same period. Nevertheless, the analysts point to the big jump in overdue loans after the moratorium was lifted as a sign that stress has risen even before concerns about the second wave began to take root. This stress would take a while to peter out, according to the rating agency.

“The level of loans in overdue categories has increased after the moratorium has been lifted and the impact on asset quality will be spread over FY2021 and FY2022 as various interventions and relief measures have prevented a large one-time hit on profitability and capital of banks," Icra said in a 5 April report.

The central bank has also refrained from extending other relaxations. The one-time restructuring has been allowed to lapse. The upshot is that a true picture of stress on the books of banks would be visible from the fourth quarter onwards. As such, analysts expect bad loan ratios to rise in the March quarter. The question now is how long this stress will stay elevated.

Among banks, those that have a larger share of small business loans and unsecured loans may see a bigger impact on their earnings because of the pressure on asset quality. Most analysts believe that large lenders have made enough provisioning to tide over future stress. Coupled with the balance sheet size and a healthy credit growth, lenders such as HDFC Bank, ICICI Bank, and State Bank of India (SBI) are better placed than their smaller peers. For instance, HDFC Bank reported a 13.6% growth in its loan book for the March quarter driven by corporate loans.

In the coming quarters, the focus of banks would continue to remain on recovery rather than loan growth, given that the pandemic keeps the risk of intermittent lockdowns high.

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