Capex revival in the economy remains uncertain as consumer demand continues to slow down, putting banks under stress.

Though there may be some outliers like the telecom sector, banks will continue to move under the shadow of non-performing assets (NPAs) looming behind it as capacity utilisations have sharply declined, with the pandemic continuing to jam operational efficiencies.

To companies effecting salary cuts and streamlining the work force, the retail loan growth and repayments are bound to get impacted. Analysts expect banks to report stress of 4–7%.

“We expect stress recognition through actual slippages of 4–7%; provisioning build-up (both on restructured and incremental stress) estimated at 2–4%; interest income reversal and lower CD (credit deposit) ratio will drag NIMs (net interest margins) by ~15–20 bps,” ICICI securities said in a report.

Banks are likely to make Performa NPAS and hike provisions, but this still will not tell the entire story on stress or defaults. With industries failing to run to capacity and demand being sluggish, bank credit growth both on the corporate side and retail segments are slowing down.

“Industry data through November 2020 shows that corporate loan growth has slid into negative territory. Credit to large industries contracted 3% over the previous year while MSME (micro, small & medium enterprises) loans grew 5% over the previous year with some support from the MSME credit guarantee scheme (ECLGS). Most banks are focused on lending to better rated companies. Most sectors are witnessing muted loan growth except a few, like telecom,” said Kotak Institutional Equities in a report.

Federal Bank in its business update reported muted 6% loan growth for 3QFY21, while Karur Vysya Bank has reported 5% growth over the previous year. Yes Bank’s advances were down 9% over the previous year (December 19–20), but it was up 1% sequentially .

Brokerage firm Sharekhan said, “However, strong pickup in economic activity and encouraging collection efficiencies indicate improving outlook; earlier fears of NPLs at significantly elevated levels (once recognition is allowed) have been abated.”

Data, however, is pointing to a slowdown in credit across sectors. “Retail loan growth is down ~600 bps from March 2020 level, reflecting Covid-related demand impact. Credit card loan growth has recovered partially to ~8% year-on-year after dropping to near zero levels showing double impact of slower originations as well as faster run-off due to short-tenor nature. Housing growth has also slid to ~9% levels from 16–17% levels seen a year ago, while vehicle loans have held up relatively better at ~10% YoY,” Kotak said in its report.

Bank funding to non-banking financial companies (NBFCs), which had spiked to ~50% YoY in 2HFY19, has moderated significantly to ~8% as of November 2020.

Data from credit rating agency TransUnion CIBIL also indicates that retail loan inquiry volumes have picked up and stood ~7% below year-ago levels in November 2020.

While public sector banks demonstrated earliest recovery in loan inquiries, private banks also exited negative territory in November 2020 showing a recovery in credit demand.,” the Kotak report said.

Though home and auto loan enquiries are up, the enquiries for personal loans are sluggish.

Analysts say retail loans are showing strong signs of recovery. “Retail disbursements are showing healthy recovery (led by tractors, 2W, housing loans, and gold loans), with certain segments reaching pre-Covid levels or even higher. On the other hand, banks remain cautious on the unsecured book. CV and corporate loan demand remains tepid,” Motilal Oswal said in a report.

“While credit demand is recovering from post-lockdown lows along with approval rates and share of NTC (new-to-credit) originations, we expect loan growth recovery to be slower than expectations of market participants,” the Kotak report added.

Analysts also maintain that slowing credit will not be across all banks. Larger banks will report better credit growth. “Even though overall credit growth has been weak on system levels, at 5% over the previous year, larger and well-placed banks (such as HDFC Bank, ICICI Bank, and SBI) are expected to report better advances growth, indicating market share gain. Most banks and NBFCs indicated pickup in disbursements, collections, better funding access, and decline in cost of funds, on a sequential basis, and indicate normalisation is looking to be nearer than earlier anticipated,” Sharekhan said in its report.

“The recent spate of capital raising will be positive for balance sheet strengthening, and gradually reducing liquidity buffer will be positive support for margins and medium-term return ratios. We expect GNPAs (gross non-performing assets) to show sequential improvement, but resolutions would be negligible. We believe the real asset-quality picture would emerge in H2FY2021 only,” Sharekhan added.