India’s top lenders expect a larger proportion of their borrowers to seek repayment relief after the Reserve Bank of India extended the temporary provision until the end of August. This, despite the fact that India’s now attempting to restart economic activity after a 72-day lockdown.
According to four senior bankers who spoke to BloombergQuint on the condition of anonymity, a number of wholesale borrowers, large and small, have started sounding out bank branches on the need for an extended moratorium.
According to the first of the four bankers cited earlier, a senior official at State Bank of India, when the lender had first offered the three-month loan repayment moratorium in March, there were few takers. This was because borrowers feared the accrued interest that would have to be paid in return for a three-month repayment holiday. However, as the period of lockdown continued to stretch out, more and more companies faced cash flow shortages and sought a moratorium.
As of May, about 35-40 percent of SBI’s loan book was under moratorium, this banker said. After the RBI extended the moratorium, more borrowers have sought relief, the banker said. Requests are coming in from all categories of borrowers, large corporates, MSMEs and retail borrowers.
In the case of Bank of Baroda, nearly 65 percent of the loan book was under moratorium at the end of the last month. A senior official at the bank, who spoke on the condition of anonymity, said more borrowers from the corporate loan book are seeking the moratorium, which is being granted on a case-to-case basis. The requests for moratorium are coming largely from companies that have been affected by the lockdown, such as aviation, hotels and hospitality as well as manufacturing, the banker said.
Since a large number of MSMEs had to shut operations during the lockdown, the cash position of these companies will not allow them to immediately start repayments, even as the economy starts opens, bankers said. Moreover, with a number of companies laying off employees and announcing pay cuts, bankers fear that more retail borrowers will want to defer their repayments.
Macquarie Securities, in a report dated June 3, said that the cases under moratorium are set to rise materially during the extended moratorium.
Currently 20-30% of the loan book is under moratorium.The situation is evolving but initial signs based on the feedback from banks and consultancies is that by end-August more than 50% of the loan book could be under moratorium.Suresh Ganapathy, Macquarie Securities
Flying Blind On Asset Quality
The moratorium, first announced in March, allows borrowers to defer repayments without attracting an asset quality downgrade till the deadline ends. During this period, banks have been asked to set aside more provisions against accounts under moratorium.
With the moratorium now stretched out over six months, bankers are debating what the eventual impact on asset quality will be.
According to the third banker cited earlier, the wholesale lending head of a private bank, the moratorium will only serve as a temporary respite from a more structural problem. A weak economy and loss of monthly income will mean that repayment capacity of many borrowers will be impacted. While the moratorium would have run its course by Aug. 31, the problems these borrowers are facing would still be around, this banker said. It is likely that it would take another three to six months before borrowers are able to repay their dues as they usually would, he added.
The Bank of Baroda official cited earlier also said the bank’s internal estimates suggest that some degree of normalcy in repayment capacity will only return by December.
PN Prasad, former deputy managing director of SBI, said that the true impact of the moratorium on asset quality will only be visible in the latter half of the current financial year.
“There is a moral hazard to extending a loan moratorium, since there can be an effect on credit discipline. Bankers will have to be watchful that smaller borrowers don’t lose sight of the fact that they have to continue repaying loans after Aug. 31,” Prasad said. “It’s likely that banks will see higher slippages from accounts which have sought moratorium.”
To avoid a sharp rise in reported bad loans later this year, banks have requested the RBI to allow one-time restructuring without an asset quality downgrade. The regulator is yet to respond to this request.
In the absence of any such provision, bad loans are set to rise, said Macquarie Securities in its report. “If we assume 20% of the loan book under moratorium going bad, then non performing loan accretion will be at 10% implying that non performing loans will double from current levels of 10%,” said Ganapathy.
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