IBSPECIAL

Lying under the shadow of the corona virus pandemic, the Indian economy is getting mauled. Businesses are struggling to be fully operational amid a spurt in Covid-19 caseloads, supply chains are disrupted, consumption demand is weak, corporate credit appetite is low, jobs are being lost, salaries are cut, and nobody can say with certainty when all this will end.

The April-through-June quarter just vanished with almost no business activity and the economy shrank by a record 23.9% over the year-ago period, the worst gross domestic product (GDP) contraction in decades. There has since been some limping back to activity and September is looking marginally better, but we are still on the bumpy road.

In the midst of all this turbulence, Lakshmi Vilas Bank has tumbled and Dhanlaxmi Bank could land in serious trouble. Early this year, Yes Bank had to be rescued with the State Bank of India (SBI) acquiring a 49% stake in it. So, will many more banks crumble under the weight of non-performing assets (NPAs) and the Covid-induced financial crisis after the one-time debt restructuring window is shut?

That may not be the likely scenario. The collapse of Yes Bank and Lakshmi Vilas Bank has more to do with fancy and questionable lending to some corporates and less to do with the health of the economy. The fate of Dhanlaxmi Bank rests on improving the way the bank is run with a clean-up of the management. So it will not be fair to conclude that the NPA storm will gobble up more faltering banks, unless the problem springs from chunky lending to a few favoured corporates.

Banks, who are at the receiving end, now have the task cut out to restructure loans which are classified as standard assets as on 1 March 2020. There has been no rush yet from the corporates, micro, small and medium enterprises (MSMEs), and retail borrowers to go for a debt recast that will give them a two-year breather. This has prompted the SBI chairman Rajnish Kumar to predict that Rs 2 trillion worth of loans will get restructured by banks under the Reserve Bank of India (RBI) scheme. Based on preliminary requests made by borrowers, he believes SBI will get to restructure loans worth Rs 20,000 crore, including Rs 7,000 crore from corporates and Rs 3,000 crore from retail borrowers.

India Ratings' estimate of Rs 8.4 trillion of loans getting restructured is at the other end of the spectrum. ICRA, another ratings agency, has pegged the quantum of debt that can get restructured at anywhere between Rs 6 trillion and Rs 10 trillion. Kumar has, however, rubbished these figures and said that the "Rs 8-trillion amount is grossly overestimated".

Union Bank of India managing director and CEO Rajkiran Rai admits that the situation is dicey, but he does not agree that loans going for restructuring will go beyond 6% of the total bank credit. "Rating agencies have looked more at the moratorium book and made their calculations based on that. Large corporates have been working at above 60% levels of efficiency since September. We will be in a better position to judge by October-end. In the present Covid situation only a fool can say that he will be able to make a perfect prediction."

The new round of NPAs is expected to come from retail and MSME loans. The stressed assets of most of the big corporates have been recognised in the last couple of years and the Insolvency and Bankruptcy Code (IBC) has helped resolve many cases. On the infrastructure front, fatalities to several entities have already happened.

"On the big corporate side, there will be a lesser challenge this time, particularly on sectors like steel which have been cleaned up in the earlier round. Now it is the turn of retail and MSME NPAs to show a rise. Part of this has been tackled, though, by the moratorium on loan repayments for six months," said Federal Bank executive director Ashutosh Khajuria.

Job losses and salary cuts following the outbreak of the coronavirus will cast their shadows on retail NPAs. ICRA vice president and financial sector ratings head Anil Gupta said it would be anybody's guess if the new retail NPAs stand between 2% and 5% of their loan book, though it is certain to rise in the backdrop of the high rate of unemployment and wage reductions. "If the retail NPAs go beyond that, it should be a matter of worry," he added.

Banks with a heavy retail exposure will have to be put on the watch. IndusInd Bank and Bandhan Bank, which have a high exposure of unsecured loans to the retail and MSME sectors, will have to be cautious, said Gupta.

The banking industry is readying to absorb 5% of new NPAs, built over a two-year period. In normal circumstances, loan delinquencies of 2-3% get created annually. "With the operating profit and recoveries, an annual NPA of Rs 2 lakh crore is manageable. Banks will need to increase their provisioning to meet the needs of any situation that belies expectations," said Gupta.

Rai believes the old NPA issues are more or less over as banks on average have made provisioning of over 70%, with some even going as high as 85%. "It is the new NPAs that have to be tackled. We have to keep watch on the new creations," he said.

The quantum of NPAs that will get added to the banking system is anybody's guess. What if the borrowers are on the cusp of default? "If banks do not handle moratorium and one-time debt restructuring properly, we could see new NPAs of Rs 4-5 lakh crore," said a senior bank official who did not want to be named.

The RBI has provided for a restructuring period that will be valid for two years. Besides, it has tightened the eligibility criteria for one-time restructuring by specifying that the account has to be standard as on 1 March 2020. "The RBI has given banks eight quarters for the provisioning. This is a very sensible step," said Khajuria.

Capital deficiency can arise as banks are required to provide for 10% of the loans restructured. Banks may need to provide for anywhere between Rs 50,000 crore and Rs 80,000 crore for this purpose, according to various estimates. Most of the banks have started working out their capital-raising plans and some of them have even completed them. "There are a few small banks left like South Indian Bank, Federal Bank, and Karur Vysya Bank which need to raise capital," said Gupta.

IDBI Bank is on a better wicket than what it had visualised at the beginning of the year. Though the bank has got the approval to raise up to Rs 11,000 crore, it may decide to scale down its fund-raising plan as two stressed sectors run no risk of turning into fresh NPAs this year. "We thought our exposure to Vodafone in the telecom sector and a few power projects would turn into fresh NPAs. But Vodafone has got a breather. With the government announcing a Rs 90,000 crore liquidity injection into cash-starved electricity distribution companies (discoms) as part of a stimulus package, our fund-provided power projects will not sink into NPAs, at least not this year. Now we may decide to raise less than Rs 11,000 crore as we will need the capital for growth and not provisioning, as we had earlier thought," a senior IDBI official said, requesting anonymity.

In an internal estimate from feedback collected from all its branches, IDBI Bank has pegged 6% of its loans to move into restructuring, the source said. In March, the bank believed that 20-30% of its loans would be restructured.

IDBI, which has ramped up its retail loan portfolio, is expecting a low component to get into debt restructuring. "Most of our retail loans are security-backed," the source added.

Global rating agencies, however, have expressed concern over the asset quality of Indian banks, saying the path to recovery will be painful. The banking systems of India, Mexico, and South Africa will be slower to recover to 2019 levels likely beyond 2023, S&P Global said in its report. The banks' recovery to long-term averages for key asset quality and profitability ratios will take years. Emerging market banks will likely see a sharp rise in credit losses, it added.

There are a few indicators which are positive. Interest rates in major markets are negative, India has huge forex reserves, there is ample liquidity, and foreign direct investment (FDI) is flowing in. India is the last major market to tap into, particularly after the US and many other countries have spoilt their relationship with China. Apple, Amazon, and Walmart have expressed their intent to increase their investments in India. The rural economy has also picked up.

You can chew into the other scenario as well. Unemployment rate is high, stressed debt is set to increase, corporate credit is yet to get into investment cycle, and the consumption engine is sputtering. The balance sheets of the banks could be hit hard.

Rai, however, is confident that Indian banks will be able to absorb the spurt of new NPAs and emerge stronger than before. "We have handled NPAs when they had touched Rs 12-13 lakh crore. Now the NPAs will be less than half of that."