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Business News/ Markets / Mark To Market/  Truth on asset quality lies beyond the bad loan figure of lenders
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Truth on asset quality lies beyond the bad loan figure of lenders

Restructuring may involve a moratorium of two years on repayments and therefore an elongated repayment schedule. Ergo, banks end up forgoing interest income, thereby dragging down their core income for the period

Even as banks restructure loans, the legacy bad loan pile undergoing resolution in insolvency courts also need to be watched.Premium
Even as banks restructure loans, the legacy bad loan pile undergoing resolution in insolvency courts also need to be watched.

India’s banks have begun showing a drop in bad loan ratios in FY21. In the June quarter, gross bad loans as a percentage of total loan book dropped for 23 out of the 30 listed banks. In the second quarter of FY21 too, analysts expect bad loan ratios to remain steady or drop further.

But the pressure on asset quality has, in fact, increased on banks in the wake of the pandemic. Ergo, for banking investors, it would be futile to take this as an indicator of asset quality not just for the September quarter but also for the whole of FY21. The reason is regulatory forbearance on asset classification. The Reserve Bank of India (RBI) has allowed loans to be restructured and not labelled as bad.

But analysts have flagged other metrics to judge how troubled or not a bank is on delinquencies. Special mention accounts (SMA), and proportion of restructured loans are two such key metrics.

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“This quarter, the obvious metric to watch is SMA figure as it shows what kind of stress can be expected," said Anand Dama, analyst at Emkay Global Financial Services.

An account is SMA when the borrower has not paid dues for 30-60 days. They indicate incipient stress in the loan book as a loan is treated as non-performing only when dues are unpaid beyond 90 days.

More importantly, analysts are hoping that managements of banks would give an indication of the amount of loans they would end up restructuring post the end of moratorium in August. Indeed, more than the actual performance metrics for September quarter, investors are looking towards management commentary.

“The highlight of Q2FY21 earnings is likely to be informed clarity by lenders on the quantum and texture of loans to be restructured," analysts at Edelweiss Securities Ltd wrote in a note.

The country’s largest lender State Bank of India Ltd has indicated that restructuring would be manageable, both in retail and corporate loans. Analysts at ICICI Securities Ltd believe that about 5-8% of the banking sector’s loans may get restructured. However, there are worries that restructuring levels could rise. Analysts at Jefferies India Pvt. Ltd have flagged the recent trend in the bounce rates of automated payments through NACH (national automated clearing house). The bounce rate was 32% in September, higher than pre-pandemic levels of 25%. This shows that the stress is still high on the loan book.

Restructuring has several implications for banks. It may involve a moratorium of two years on repayments and therefore, an elongated repayment schedule. Ergo, banks end up forgoing interest income, thereby dragging down their core income for the period. As such, the growth in core income of banks has decelerated over the years. That brings us to the legacy bad loan pile of banks. Even as banks restructure loans, the legacy bad loan pile undergoing resolution in insolvency courts also need to be watched.dergoing resolution in insolvency courts also need to be watched.

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Published: 08 Oct 2020, 03:38 PM IST
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