Unfortunate floods have impacted several business activities in Kerala, which may take considerable time to recover (few districts impacted much more than others). We look at the exposure of the banking system to sectors like agriculture, MSMEs, etc. to gauge the impact; RBI restructuring rules will lower the impact, though, initially.

Banks’ exposure to Kerala
Overall loan exposure to Kerala was 3% in FY18 (2.8% for SOE banks & 4.2% for private banks). South Indian Bank (SIB IN,
Rs 18, NC), Federal Bank (FB IN, Rs 86, Buy) and Canara Bank (CBK IN, Rs 277, NC) are likely be most impacted, their exposure to the state being 41%, 36% and 7% respectively.
IIB has an exposure of 4.5%. SBIN, HDFCB,
ICICIBC, AXSB have exposures of 2-4%.

Impact of floods
The floods would lead to some recovery delays and losses for the banks, typically in agriculture loans, MSME priority sector loans (PSL), home loans and trade-activities. Of the Kerala loans, 24% of exposure is to agriculture (28% SOE, 18% private), 16% is to PSL MSME (15% SOE, 19% private) and 11% is to housing loans (16% SOE, 4% private). With cash flow issues expected to prevail for some time, NPLs in the state could remain elevated. As of FY18, Gross NPL ratio for Kerala loans was 3.6%.

RBI relaxation
RBI regulations allow restructuring of loans in case of a natural calamity, wherein the restructured loans can be treated as current dues and need not be classified as NPL. However, banks will need to make higher provisions with respect to restructured loans and they can use floating provisions to provide for eventual losses. We expect RBI’s relaxation to defer NPL spike in the near term. For SOE banks with thin buffer of floating provisions, P&L impact could be larger. Within private banks, only HDFCB carries 20 bps of loans as floating provisions, for others it’s miniscule.

Agri loans
Short term crop loan dues may be converted into term loans, with revised repayment period depending on the extent of crop loss—with a minimum moratorium period of one year in all cases. Of total
outstanding agri loans of Rs 766.3 bn,
78% are short-term crop loans.

Other loans
For other advances like loans to rural artisans, traders, micro/small industrial units or in extreme cases, medium size enterprises, banks need to decide on restructuring of credit/disbursal of fresh loans based on business viability of borrower after rehabilitation. While there is no hard limit/caps, repayment period for restructured loans should generally be kept under 5 years.