Home >Markets >Mark To Market >Tag, you’re it! India’s banks find themselves holding one too many risks

In the game of tag, it is rather unpleasant to be “it". Indian banks are finding themselves being tagged with one too many risks.

The anxiety among their investors is evident from the over 7% crash in the Nifty Bank Index in the last two trading sessions.

The list of worries is long.

Graphic: Naveen Kumar Saini/Mint
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Graphic: Naveen Kumar Saini/Mint

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To start with, the Union government’s economic package has disappointed the market. Most measures announced by the finance minister are either medium-term in nature or may not help beyond the margin. As such, the sectors most affected by the pandemic such as tourism, hospitality and aviation have been largely ignored.

It is no surprise that lenders financing these sectors would see their balance sheets decay fast.

To make matters worse, the government has suspended the Insolvency and Bankruptcy Code (IBC) for a year. The intent is to protect companies from being dragged to the courts for no fault of theirs. But what this also does is take away the power from lenders to pull up even errant borrowers.

If that is not all, bankers cannot figure out how much stress is on their books right now. The current moratorium period on loans serves only to kick the can down the road.

Once the moratorium is lifted, many borrowers may not be able to repay. Analysts say bad loan metrics are bound to rise in the next two quarters.

“Lending being a leveraged business faces significant valuation risks in such an uncertain environment due to asset quality pressure," wrote analysts at Motilal Oswal Financial Services in a note.

The list of troubles is far longer for non-bank financial companies (NBFCs). NBFCs go where banks fear to tread and therefore take on more risks.

A glimpse of the potential stress on NBFCs is visible in Mahindra & Mahindra Financial Services Ltd’s fourth-quarter results. Roughly 75% of its borrowers opted for the moratorium and collections were down to just 15%.

Even as asset quality bites, NBFCs face a bigger problem of asset-liability mismatches. The government has given direct support through partial credit guarantee and the targeted repos of the Reserve Bank of India has helped too.

But the impact won’t be much, analysts fear.

“We do not expect these new measures to significantly help the smaller NBFCs and their funding conditions are likely to remain difficult. We expect that NBFCs will continue to pose risks to the banking sector as banks are a large lender to the sector," analysts at Moody’s Investor Services Ltd wrote in a note.

As the economy braces for a recession, its financiers are headed for tough times. While many industries are vying for help from the government, pleas of the financial services sector should be among the first to be addressed.

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