Increased Working Capital Demand, Loan Collections Immediate Concerns For Banks

Faced with lockdowns across most states and key businesses, India's banks are bracing for a decline in collections and increased demand for working capital from borrowers.

Over the last few days, as the number of Covid-19 cases in India have risen, restrictions have become stricter, leading to sharp drop in business across a number of industries.

According to three senior bankers, who spoke to BloombergQuint on the condition of anonymity, lenders are currently in talks with borrowers to understand their needs and provide any kind of support they can. The first step is to provide support to small businesses, who have limited cash reserves to deal with a sharp drop in business.

So far, State Bank of India has announced ad hoc credit facilities for its small borrowers, worth up to Rs 200 crore, to tide over temporary cash management issues. India’s largest lender will provide 12-month loans at a flat interest rate of 7.25 percent to its standard borrowers as part of this line. The loan will carry a six-month moratorium on repayment and will have to be repaid over the following six months, SBI’s Managing Director PK Gupta told BloombergQuint.

A senior SBI executive, speaking on the condition of anonymity, said the bank is also discussing whether it can provide additional loans to sectors such as aviation, logistics, toll roads and transportation. This person said that the bank may need to look at providing comfort loans, like during times of natural calamities, which are repayable over time. But without a signal from the Reserve Bank of India, we cannot do much, this person said.

Other state-run lenders such as Union Bank of India, Central Bank of India and Syndicate Bank are also in the process of finalising packages for small and mid-sized borrowers.

The measures could include providing extended credit lines and emergency loans to help these lenders avert the non-performing tag, two of the three bankers cited earlier said. Within the RBI’s prescribed timelines, lenders will try and adopt a lenient approach toward recovery of loans at this time, the bankers said.

Private sector lenders such as HDFC Bank Ltd. and Axis Bank Ltd. are also assessing any short-term needs of borrowers.

In a conference call on Monday, Aditya Puri, managing director and chief executive officer at HDFC Bank, said that the lender will support its wholesale borrowers by extending further working capital credit and could selectively considered higher loan-to-value ratios as a way to extend more loans.

While banks can offer some relief to corporate and small business borrowers, there are few options to ease the pain for retail borrowers. This is the case even for non-bank lenders and housing financiers.

“Until RBI eases the rules on bad loan classification, we can do little to help individual borrowers who may be facing short term cash flows," said a senior executive at a housing finance company.

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Collection Troubles

Meanwhile, curfews and restrictions on movement in the wake of the coronavirus outbreak are already starting to impact collections.

The housing finance company executive cited earlier said collections fell to about 85 percent of the normal levels by mid-week last week. By the end of the week they were down to about 65-70 percent of normal levels.

Other bankers agree that collections will be impacted over the period of lockdown and RBI will need to make adjustment. A 180-day recognition period would be essential, this banker said.

At least 75 Indian cities have gone under lockdown owing to the rapid spread of the novel coronavirus. In Mumbai and Delhi, state governments have ensured that only essential services are functional.

While the RBI has so far announced a number of measures to tackle risks emerging in the markets, it’s yet to announce any relief measures for bank borrowers.

To support the banking industry at this time, the RBI would need to come out with a rate cut, forbearance on asset classification and provide a liquidity window where banks can borrow against corporate bonds, a private sector banker said.

A corporate repo window would also help the mutual fund industry to access liquidity, which it can use to lend to smaller lenders, thereby ensuring that more borrowers get access to emergency funding, the banker added.

Also Read: RBI Offers Large Liquidity Support To Prevent A Market Freeze

HDFC’s Puri shared that view. “I see no option but to offer broad forbearance across sectors and industries,” he said during this conference call on Monday.