Anything that can go wrong will go wrong. India’s bankers would do well to remember the Murphy’s law this year as their past problems get amplified by a pandemic.
The world’s worst bad loan pile, which banks began hacking away at, is only going to increase further this year, and the baseline assumptions of Standard and Poor’s analysts put this at 13-14% of total loans.
That is higher than the previous peaks in FY18 when the regulator forced banks to reveal their true asset quality through reviews. But unlike FY18, when the economy was growing, albeit slower than before, FY21 will see a recession. That would not only mean faster delinquencies but also limited opportunities for recovery.
“We believe that the difficult operating conditions would lead to a rise in delinquencies at one end and delays in recovery on the other end. This will further push up NPLs (non-performing loans) and credit costs for the banking system,” said S&P in a report.
Weak companies hard hit by the recession are likely to default and some banks have already seen a spike in defaults. Bankers said once the moratorium on repayments ends in August, bad loans would surge.
While the moratorium makes it difficult to asses the extent of bad loans, good loans may hardly grow. A recession would mean manufacturers will not invest for the long term. As factories run below full capacities, the need to borrow for working capital, too, will be lower than before.
State Bank of India, the country’s largest lender, is expecting loan growth of 7-8% in the current year. Most of its peers, too, have indicated similar growth numbers. Private sector banks, however, have indicated slightly healthier loan growth, perhaps on the hope of gaining market share.
As for recoveries, bankers hope that the ongoing insolvency cases would not be held up, even as they cannot refer fresh cases, as the Insolvency and Bankruptcy Code (IBC) stands suspended for a year.
But even with the help of IBC, recoveries haven’t shot up for banks, if one leaves out large corporate cases such as Essar Steel Ltd. Simply put, bankers have been betting on a revival of economic growth for recoveries to increase. Instead, what they have to contend with this year is a recession.
In the wake of this, it is not surprising that despite the recent rally, the Nifty Bank index is still down 31% from its peaks in February. Analysts have cut earnings per share estimates of most banks.
India’s banks are in a perfect storm this year with a recession crimping the loan book and hitting its quality as well. Lenders would need the shelter of capital, which Fitch estimates would be $15 billion.
It remains to be seen how banks will build this shelter in a hostile market environment.