Delay in regulatory leeway likely to prove costly affair for banks

The sharp rally in banking stocks, which rose 10-12 per cent, in the first half of Thursday’s trade did not sustain fully as hopes of relief or bailout measures for the sector from the finance minister did not materialise. The minister though has kept the option open for more relief measures as and when needed, which suggests that some relaxation (from the Reserve Bank of India or RBI) on asset classification norms (critical for classification of non-performing assets or NPA) may come through for the sector. While hopes of some relief have been around for over 10 days, any further delay could prove costly for banks. Analysts are already downgrading their earnings expectations, with private banks likely to see a sharper cut. In fact, an across-the-board earnings downgrade is also the first of its kind for private banks.
The nation-wide lockdown, which was initially to be more a problem for small and medium enterprises (SME) exposure of banks, is beginning to spread. “The current pan-Indian lockdown will certainly affect cash flows of borrowers, both individual and corporate, which may lead to an increase in corporate as well as retail NPAs,” say analysts at ICICI Securities. “The lockdown will adversely impact most sectors and may not be restricted to chemicals, textiles, electronics, and entertainment,” they add.

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The last time when banks received dispensation on asset recognition was in 2016, after demonetisation. The RBI gave a 90-day window for classifying certain retail loans as NPAs. “Without a similar dispensation being extended from the March quarter, banks could find it very difficult to sail though,” said a top executive of a state-run bank. Another senior banker said unless such dispensations are soon given, it may be difficult, especially for private banks, to lend support to customers. While most state-owned banks have come out with special schemes for their customers battling the lockdown, private banks are yet to act. “The longer it takes to roll out these relief measures, the prolonged will be the period of dull growth for banks,” he adds while mentioning that business volumes have been quite negligible in the last two weeks.
Investors need to remember that loan growth has been pale at single-digit in CY20, so far. Therefore, unless the RBI temporarily relaxes its NPA norms, banks may find the going getting tougher. PhillipCapital estimates that NPAs could rise by 250 basis point for the sector if relaxations are not given.
Thus, “Until there is clarity on the sort of dispensation the RBI is willing to roll out, investors should not be fancied by the steep correction in banking stocks,” says a research analyst of a foreign brokerage.

Covid-19 impact: Banks want NPA forbearance for next two quarters or more

While the government has raised the threshold for invoking insolvency under the IBC (Insolvency & Bankruptcy Code) to Rs 1 crore from Rs 1 lakh, financial institutions and banks expect much more, with banks in particular want at least 90 days deferment in NPA (non-performing asset) classification. The real impact of the crisis could be felt in the next two quarters, they said.
A senior official of State Bank of India said, “The real economy is in deep trouble. In the next two quarters or more, banks expect deferment of NPA. Additionally, sectors like aviation, airport infrastructure, logistics, transport and hospitality among other would need some stimulus.”

An account is classified NPA if the default is beyond 90 days. With the present crisis, a very large number of accounts will fall in this category in the next two quarters.
According to a senior banker of a public sector bank, there is need for blanket forbearance on accounts which will turn NPA in the next three months. “Otherwise a huge number of accounts will turn NPA,” said the banker.
“So far the government has spelled out relaxation on compliance-related issues. We expect the government will soon come out with bigger relief for the banking sector,” said head of another public sector bank.
While banks are seeking relaxations, a number of non-banking finance companies are looking up to banks for moratorium. For example, in case of NBFC-MFIs, as the operations will remain suspended, and MFIs would not be able collect dues from borrowers. According to Manoj Nambiar, chairma n, MFIN (Microfinance Institutions Network), if MFIs are to provide any relaxation to their borrowers, they expect similar treatment from banks.
"The government been taking a number of steps to ring-fence the economy from the pandemic. The finance minister's decision is a welcome move and will protect MSMEs from liquidation to a large extent. However, SMEs and MSMEs depend on large institutions for their survival and growth. Hence, the government must also extend necessary support to large corporations as well since they employ a large number of people and MSMEs are dependent on them. Without adequate support from the government India will be staring at an economic catastrophe," said Sunil Kanoria, Vice Chairman, Srei.
It may be noted, the present quarter while coronavirus might lead to much restructuring in the present and next quarter, higher provisioning needs on account of failed resolutions of accounts under ICA (inter creditor agreement) will further add to bankers’ woes.
“Through the uncertain period, we can expect several new NPAs in the near future. With the increase in threshold and possible suspension of Section 7 of IBC, the banking sector may have to look at other avenues outside of the IBC to claim for the defaults. Secured lenders could possibly explore Sarfaesi. The banks with also have to look for some financial aid from the government,” said Saurav Kumar, Partner, IndusLaw.