Loan delinquencies materially increased in SME, retail segments; NPLs may jump 50% in 2 years: Moody’s

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August 26, 2021 4:33 PM

Credit and Finance for MSMEs: The retail and SME NPL ratio has increased at most banks rated by Moody’s. This included Punjab National Bank, Union Bank of India, Bank of Baroda, Yes Bank, ICICI Bank, IndusInd Bank, Axis Bank, and HDFC Bank.

Moody's said NLPs will form more quickly in second wave than during the first wave, with loans to self-employed individuals along with SME loans, being the most susceptible to deterioration.

Credit and Finance for MSMEs: India’s second Covid is leading to new impairments of loans, mostly in SME and retail segments as new lockdowns to contain the resurgence of the coronavirus further erodes savings and earnings among many self-employed individuals and SMEs, Moody’s Investors Service said on Thursday. “Their income already took a hit from economic disruptions during the first wave, and families with infected members had to bear the additional burden of medical expenses. Also, government measures to support households and businesses are more limited this time around.” Consequently, non-performing loans (NLPs) will form more quickly than during the first wave, with loans to self-employed individuals including auto loans, microfinance, and unsecured loans along with SME loans, being the most susceptible to deterioration, it added.

“Loan delinquencies have materially increased within self-employed retail segments such as credit cards, personal loans as well as loans to small and medium enterprises. In our baseline scenario, we expect new NPL formation to increase by 50 per cent over the next two years to about 1.5 per cent of gross loans from 1 per cent of gross loans in fiscal 2021,” Alka Anbarasu, Vice President and Senior Credit Officer, Financial Institutions, Moody’s Investors Service told Financial Express Online.

Importantly, the retail and SME NPL ratio has increased at most banks rated by Moody’s. This included Punjab National Bank (11.6 per cent from March 2020 to 15.6 per cent in June 2021), Union Bank of India (11 per cent to 12.7 per cent), Bank of Baroda (7.4 per cent to 9.3 per cent), Yes Bank (1.5 per cent to 3.4 per cent), ICICI (1.7 per cent to 3.2 per cent), Indus Ind Bank (1.5 per cent to 2.9 per cent), Axis Bank (1.9 per cent to 2.8 per cent), and HDFC Bank (1.3 per cent to 1.7 per cent). SBI, Canara Bank, IDBI reported a decline in retail and SME NPL ratio, according to the report by Moody’s.

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However economic recovery, a tightening of loan underwriting criteria that had been underway prior to the pandemic, and continued government support for borrowers will prevent sharp increases in NPLs, the credit rating firm noted. This meant that the current situation will delay but not significantly derail improvements in banks’ balance sheets that had begun few years prior to the pandemic. “Banks’ average NPL ratio will still edge down by the end of March 2023, largely a result of the resolution of legacy NPLs and an acceleration of credit growth, which will offset increases in new NPLs,” Anbarasu added.

The Reserve Bank of India (RBI) had earlier this month said that it was aware of the stress in the retail and MSME segment but it is not alarming. At the post monetary policy press conference, RBI deputy governor MK Jain had said, “there is a visibility on a little bit of stress from the past data, but definitely it’s not alarming.” Jain had informed that RBI conducts stress tests and has been engaged with the regulated entities regarding the issue.

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