Home / Markets / Mark To Market /  Retail loans up for first litmus test post covid as banks look to recast debt

India’s retail borrowers face their litmus test and the results will determine whether bankers will change their view on retail lending.

Ultra-low bad loan ratios and a fast-galloping consumption wheel had given banks enough confidence to binge on retail loans for a decade now.

But the pandemic has shown that retail borrowers could line up for renegotiating loan covenants and analysts are worried that the portion of loans restructured won’t be comfortable. Those at rating agencies expect not less than 1 trillion retail loans to get restructured by banks. While that may be a modest 4% of the 25 trillion retail loan pile in the system, it nevertheless takes the total stressed loan portion to 6%, something unseen in the past. Also, this is the floor expected by analysts, but actual numbers could be higher. “Anything above 4-5% in retail restructuring should start to worry banks. As such, restructuring only increases the indebtedness of a retail borrower which is not healthy," said an analyst requesting anonymity.

Retail loans up for first litmus test post covid as banks look to recast debt
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Retail loans up for first litmus test post covid as banks look to recast debt

Incipient signs of trouble are already visible. First, the Reserve Bank of India’s financial stability report shows that bad loans in retail were climbing even before the pandemic. Retail bad loan ratio rose to 2.1% by the end of FY20, from 1.8% in end-September 2019. In the past three months, this ratio may have climbed further up. For the country’s largest lender State Bank of India (SBI), retail loans were the highest contributor to fresh slippages in the June quarter.

Second, the most vulnerable section of retail borrowers are the self-employed. The pandemic put a halt to the consumption wheel, hurting small businesses the most. Self-employed businessmen availing home, vehicle and even unsecured personal loans will be the first in line to restructure. Lenders having a large portion of self-employed borrowers are likely to see more stress.

That leaves the safer salaried segment. Top banks, including SBI, have said they have predominantly lent to salaried individuals. Latest employment data from CMIE shows that 18 million salaried Indians lost their jobs between April and July. Anecdotal instances of salary reductions at various sectors are another sign of impending stress.

Analysts warned that as banks restructure, they would have to be mindful of slippages, too. “Retail banks have lower moratorium loans and, hence quantitatively, provisioning buffers may seem higher, but risks might emanate from direct slippages," said Jefferies India Pvt. Ltd in a 16 August note.

As such, visibility on asset quality will be a challenge considering that moratorium on repayments will be a key factor in restructuring. Indian banks are not likely to know how strong the retail borrower is for at least two years. That is the wait for the results of the litmus test.

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