Loan moratorium may haunt banks even after getting lifted; Moody’s explains post moratorium credit landscape

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Published: April 21, 2020 5:59 PM

The loan moratorium, as suggested by the Reserve Bank of India (RBI) last month and subsequently implemented by various lenders across the country, might be able to provide some temporary relief for now but could also play a hand in changing the credit landscape of the banking sector.

Banks with a greater proportion of retail deposits, retail assets and liabilities have a better yield and lower credit costs.Moody’s said while policy stimulus will shore up credit quality for larger companies in various sectors, Asia’s banking sector profitability will also decline from deteriorating asset quality and lower net interest margins.

The loan moratorium, as suggested by the Reserve Bank of India (RBI) last month and subsequently implemented by various lenders across the country, might be able to provide some temporary relief for now but could also play a hand in changing the credit landscape of the banking sector. Moody’s Investor Service, in a research report, said that similar moves chalked out across Asia by various countries will only help mitigate credit-negative pressures on companies, banks and the broader economy, but will not fully offset the economic and credit damage. The three-month moratorium period in India will push the payment timeline back by three months for accounts that take the option.

Moody’s said while policy stimulus will shore up credit quality for larger companies in various sectors, Asia’s banking sector profitability will also decline from deteriorating asset quality and lower net interest margins. “Financial regulators in China, Australia, Malaysia, India, and some other Asian economies have enacted debt moratoriums to soften the liquidity crunch for businesses and households. While repayment delays will provide temporary relief to borrowers, these directives will also constrain banks’ abilities to take proactive restructuring and recovery actions. These measures also could lead to an even greater build-up of credit losses once the moratoriums are lifted,” Moody’s said. 

Countries across Asia have taken various measures to fight the economic impact of coronavirus pandemic. Almost all major Asian economies have announced a debt repayment holiday, tax relief, have transferred cash to households and have focused on monetary policy easing. At present Moody’s has a negative outlook for 16 banking systems in the Asia Pacific. “Banking sector profitability will also decline because of higher loan-loss provisions from deteriorating asset quality, lower net interest margins due to lower policy rates, and lower fee income on subdued business activity,” the credit-rating agency said. Further, Moody’s is expecting that if things take a turn southward and the distress faced banking sector increases, “Asian governments will likely stand behind larger, systemically important banks”.

According to Moody’s, Airlines, Retail and Hospitality, Oil & Gas, and Shipping are the sectors where the credit shock will be the most pronounced. Even after the lockdown is lifted across Asian economies, consumer confidence will be protracted, hinting at a prolonged pressure on credit quality for the said sectors. “ For some larger emerging markets, including India, external risks are contained. However, the shock of a prolonged period of much weaker growth which policy support is unlikely to mitigate will raise the debt burden from already high levels,” the report said.

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