Indian banks are on the mend after the pandemic hit. After all, most lenders have reported that collection efficiency has returned to pre-pandemic levels.
Before investors start the celebrations, they should note that lenders have either increased provisions or maintained them in the September quarter. In total, provisions are down modestly by 4.6% over one year for the 31 listed banks (excluding small financing banks). Indeed, a moratorium and a Supreme Court standstill helped them maintain the lending standard, which required no provisions. But when it comes to covid-19 risks, banks have taken additional steps to anticipate future risks.
In addition, the crude bad loan the september quarter stack is underestimated due to two abstentions. One is a direct judgment on the SC’s declaration of loans as bad in a petition involving compound interest. Until he delivers his verdict, the status quo continues. A history of the Mint from November 9 says at least ??26,000 crore in loans that could have gone wrong benefited from the court’s standstill.
This abstention follows that of the Reserve Bank of India (RBI) on loans under moratorium. Note that the moratorium ended on August 30. Retail loan clients would have seen their skipped equal monthly payments (EMI) added to their total loan portfolio. These loans would normally have been labeled bad, but due to the forbearance they are still standard. Whether or not they paid their IMEs in September, these loans would be the norm due to the Supreme Court’s status quo. Certainly, the efficiency of the banks’ collection shows that there is no generalized stress in the retail trade. But the same cannot be said for small business loans.
Defaults are mostly expected from small business loans because micro, small and medium enterprises (MSME) have been hit hard. Beyond the government’s credit guarantee program, no lender wants to reach MSMEs with a large pole. For the banking system as a whole, loans to MSMEs declined by ??6,380 crore in the first six months of FY 21. The largest lender, the State Bank of India’s SME portfolio has shrunk by 4% in the same period.
A key solace, however, is the expected restructuring portfolio for banks. There were concerns that a large chunk of the loans would be restructured once the moratorium ended in August. However, most banks said the restructuring would only represent a small percentage of their loan portfolios.
“These look quite encouraging and better than some regional markets. In fact, some lenders like Kotak Bank, ICICI Bank, AU SFB, among others, have stopped making additional arrangements for the covid and many more are likely to end it from the third quarter of FY21 ”, wrote analysts at Jefferies India Pvt. Ltd in a note.
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