Tag, you are it! India’s banks find themselves holding one too many risks

Analysts believe that bad loan ratios will worsen in the coming two quarters for all banks (Photo: Hemant Mishra/Mint)

MUMBAI: In the game of tag, it is rather unpleasant to be it. Indian banks are finding themselves being tagged with one too many risks and the anxiety among their investors is evident.

The Nifty bank index crashed over 6% on Monday and has hardly made a recovery today.

The list of worries is long.

To start with, the government’s economic package announced over a period of five days has been a disappointment to the market. Most measures announced are either medium term in nature or may not have an effect beyond the margin. As such, the sectors most affected by the pandemic such as tourism, hospitality and even aviation have been largely ignored in the package. It is no surprise that lenders financing these sectors would see their balance sheet decay fast.

“When the economy is expected to be in recession, can you expect bank NPAs not to rise? We should be ready for some really tough times ahead for banks,” said an analyst with a foreign brokerage firm requesting anonymity.

To make matters worse, the government has suspended admission to the insolvency and bankruptcy code (IBC) for a year. To be sure, the intent of protecting companies from being dragged to the insolvency courts for no fault of theirs is good. But what this does is take away the power from lenders to drag even errant borrowers. In fact, even if a company would want to wind up seeing no viability of its business, it cannot do so for at least one year.

If that is not all, bankers cannot figure out how much of stress is on their books right now. For one, the moratorium allowed by the regulator would be over by the end of May. Considering that the lockdown to curb the spread of covid-19 has been extended to 31 May, bankers want the moratorium as well as the leeway on asset quality to be extended too. But the moratorium is just kicking the can down the road. Banks are worried that even when the moratorium is lifted, not many borrowers would be able to pay. Analysts believe that bad loan ratios will worsen in the coming two quarters for all banks.

“Lending being a leveraged business faces significant valuation risks in such an uncertain environment due to asset quality pressure which led to significant erosion of capital in banks,” wrote analysts at Motilal Oswal Financial Services in a note.

It becomes even more tough as the government is leaning heavily on banks to lend to small businesses. Granted, that it would stand guarantee against such loans but banks cannot ignore the potential rise in risky assets on their balance sheets.

The list of troubles is far longer for non-bank finance companies (NBFCs). NBFCs go where banks fear to tread and therefore take on more risks. A glimpse of the stress on NBFCs is visible on Mahindra & Mahindra Financial Services Ltd’s commentary after its fourth quarter results. Roughly 75% of its borrowers opted for moratorium and collections were down to just 15%.

Even as asset quality bites, non-bank lenders have a bigger problem of asset liability mismatches. Banks have been giving moratorium to NBFCs too albeit reluctantly. Even so, borrowings through bonds have no such option. The government has given direct support through partial credit guarantee and the targeted repos of the Reserve Bank of India (RBI) 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,” wrote analysts at Moody’s Investor Services in a note.

As the economy braces for a recession, its financiers are headed for tough times. This can have large ramifications for the economy as a whole. While many industries are vying for help from the government, the financial services sector’s woes should be among the first that must be paid heed to.

source: livemint