Banks that bypassed India’s bad debts cannot escape coronavirus lockdown

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By Suvashree Ghosh

The last stronghold of India’s $ 1.6 trillion banking sector faces a test of its resilience as private lenders brace for erosion in growth and loan quality due to the coronavirus.

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The strongest private banks in the country – HDFC Bank Ltd., Kotak Mahindra Bank Ltd. and ICICI Bank Ltd. – had avoided the shockwaves which have hit public banks and shadow lenders in recent years, and which have left these sectors in difficulty. under mountains of bad debt.

But after distributing nearly two-thirds of new loans in 2019, private banks have been unable to escape the effects of India’s foreclosure on its economy, which is expected to devastate many of their retail and business customers. If they now respond by cutting new loans even to healthy borrowers, it will have serious consequences for the Indian economy and the pace at which it can emerge from the crisis.

“We expect a sharp slowdown in credit growth and deterioration in asset quality at all private banks,” said Saswata Guha, head of financial institutions at Fitch Ratings India. The individual impact “will depend on their relative exposure to vulnerable small businesses and the risky insecure retail segment,” Guha added.

India’s financial sector was rocked by a parallel banking crisis that inflated bad loans and culminated with the largest bank bailout in the country’s history. The coronavirus struck just as lenders were about to see signs of stability, forcing the Reserve Bank of India to further ease liquidity and bad loan rules to keep funds flowing through the ‘economy.

In a new round of measures announced Friday, the RBI injected $ 6.5 billion in additional liquidity for banks to lend to shadow lenders and small borrowers, further eased deadlines for bad loan rules, and banned lenders to pay dividends for the year ended March 31. .

India’s lockdown – extended this week until May 3 – has left businesses struggling to stay afloat, with unemployment hitting 23% in the last week of March and growth on the verge of receding d ‘about 5% in the current quarter, the first contraction in at least two decades.

Read also: India coronavirus update: total number of confirmed cases and deaths by state

Total nonperforming loans in the financial system could increase by 7 percentage points if India ends its foreclosure by mid-May, according to a recent study by McKinsey & Co. At 9.3%, the India already has the worst soured asset ratio of any major nation.

More than 25% of ICICI’s loan portfolio goes to sectors most vulnerable to foreclosure, such as small businesses and auto finance, according to a March 30 report by analysts at Credit Suisse Group AG led by Ashish Gupta. At Axis Bank Ltd., the proportion is 35%, according to the report, while for the small private lender IndusInd Bank Ltd., the ratio is 45%.

For IndusInd, RBL Bank Ltd. and other small private lenders, the coronavirus crisis has also pushed them to struggle to hold their deposits, as funds migrate to the perceived safety of public lenders. These private sector banks were already under pressure after the regulator banned deposit withdrawals from Yes Bank Ltd. as part of the bailout announced last month.

“The ability of private banks to withstand shocks to deposits will be critical to their survival in the future, as a strong liability franchise is crucial for a bank’s stability,” said Karthik Srinivasan, head of the financial sector rating of ICRA Ltd., a branch of Moody’s Investors Service.

Tight funding conditions for shadow lenders and small private banks could force them to cut loans, Moody’s warned in a report released this week. “As a result, businesses that rely on either type of lender for funding, many of whom have weak finances, will have difficulty maintaining liquidity, which can lead to defaults,” said Moody’s.

The benchmark index for Indian private sector banks has fallen just over 34% since early March, slightly more than the drop in the equivalent index for state-owned banks. This is a reversal from last year, when private banks grew 16% and public banks lost 18%.

Much of the historic outperformance in private banks’ share prices was due to the rapid growth of their loans relative to their public sector counterparts, who avoided taking on new loans due to a legacy of bad debt. But that gap is narrowing as even the biggest private banks pull their horns during the coronavirus crisis.

Kotak Mahindra Bank loan growth fell to 6.7% in the first quarter of the year, the slowest in at least three years and down from 10.3% in the previous three months. HDFC Bank, with the lowest bad debt ratio among its peers, has also become stricter on granting new loans, chief executive Aditya Puri said last month.

Some private sector banks are big lenders to retail customers in India, a sector largely shunned until recently by state-owned banks, which have focused on large corporate borrowers. This specialty could now haunt private lenders.

In addition to auto loans, the Credit Suisse report said real estate, credit cards and unsecured loans are particularly vulnerable during the coronavirus crisis.

IndusInd’s retail portfolios include vehicle finance and microfinance which “have gone through multiple economic cycles,” a bank representative said in a response to an email seeking comment. “We have demonstrated our ability to effectively manage these portfolios” during disruptions, including the global financial crisis and the demonetization of India, he said.

The scale of the challenge for private sector banks is expected to become clearer after Saturday, when HDFC Bank kicks off the final earnings season by releasing earnings for the quarter ended March 31.

The RBI has granted all banks a three-month grace period during which they benefit from some relief from the rules governing the recognition of bad debts. But from September, bad debt rates are expected to rise if the crisis remains acute.

Private bank credit portfolios grew 13% per year in December, more than three times the pace of state banks, according to RBI data. If asset quality begins to deteriorate, their bad debt ratios could rise from the 3.9% recorded in September, which was well below 12.7% for public lenders.

“The longer the Covid-19 persists, the more we face increased human costs, the more struggling businesses will be, the more lost livelihoods and bad debt will increase,” said Ananth Narayan, professor and industry expert financial manager who was recently appointed additional director at Yes Bank following his rescue. “Even after the lockdown ends, the economy will take a long time to return to normalcy.”

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