“The high take-up rates by borrowers of small finance banks (SFBs) and non-bank finance companies (NBFCs) is a result of these institutions’ greater exposure to riskier customer segments, such as those with more volatile income streams,” Moody’s said.
The widespread take-up of the loan moratorium could come to weigh on banks’ asset quality and, in turn, could be credit-negative for them, rating agency Moody’s said on Thursday. At the same time, most banks’ capital ratios would remain above the regulatory minimum and this may turn out to be a credit-positive.
Referring to the Reserve Bank of India’s (RBI) recent Financial Stability Report which showed that borrowers across multiple segments and all bank types took advantage of debt payment moratoriums, Moody’s analysts said that the large stock of loans under moratorium indicates that banks’ asset quality will decline because of a high risk of the deferred loans becoming bad loans when the moratorium ends. This situation is credit-negative for banks because they would likely need to absorb credit losses if they have to restructure a large proportion of their loan books as a result of bad loans.
The FSR showed half of banks’ total outstanding loans to be under moratorium as on April 30, with 39% of the corporate book, 65% of the micro, small and medium enterprises (MSME) book and 56% of the retail book being covered by the repayment breather.
Moody’s said that the high take-up rate by large corporates is surprising because companies typically have access to resources to weather near-term stress. They may have partly been motivated by a desire to preserve cash in uncertain economic times. “The high take-up rates by borrowers of small finance banks (SFBs) and non-bank finance companies (NBFCs) is a result of these institutions’ greater exposure to riskier customer segments, such as those with more volatile income streams,” Moody’s said.
The higher take-up rates by borrowers from public-sector banks (PSBs) as compared to that of private-sector banks was partly because of differences in the way the two sets implemented the moratorium. While PSBs largely operated an opt-out scheme, where customers are presumed to have taken up the moratorium unless they decided to opt out, private-sector banks largely implemented an opt-in scheme. “The higher take-up rates by corporate borrowers from public-sector banks also point to risks of the moratorium having an impact on borrowers’ behaviour and, potentially, their willingness to repay,” Moody’s said, adding that banks have recognised this risk and have begun to place much greater emphasis on collections even though they continue to offer repayment moratoriums. This is reflected in the decline in loans under moratorium at the end of June compared with the previous months.
Nevertheless, moratorium take-up rates remain high. “Furthermore, the decline in moratorium take-up rates does not necessarily mean that customers no longer in the moratorium category have no overdue payments. This is because most banks stop classifying a customer as being in the moratorium category even if only a partial repayment has been made,” Moody’s said.
The rating agency also referred to the results of banking system stress tests conducted by the RBI. Even as they suggest banks’ gross non performing assets (NPAs) are set to rise meaningfully under all four stress test scenarios, with their common equity tier-I (CET-I) ratio declining by one to two percentage points, most banks’ capital ratios would remain above the regulatory minimum. This is a credit-positive that reflects the banks’ balance sheets’ resilience to the stress of the coronavirus-induced economic downturn, as well as government infusions of capital to PSBs over the past two years. “Therefore, even with the estimated decline, capitalisation at these banks will be higher than at the trough in 2018,” Moody’s said.