When moratorium ends: Lenders brace for surge in retail delinquencies

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June 4, 2020 4:50 AM

The impact of pay cuts and job losses, a disruption in collections and also the masking of high-risk borrowers by the moratorium could all come together to increase the stress in the retail segment, bankers and industry experts said.

The true picture of the quality of retail loans will only become clear at the end of the second phase of the moratorium, he added.The true picture of the quality of retail loans will only become clear at the end of the second phase of the moratorium, he added.

Banks and non-banking financial companies (NBFCs) are preparing for a surge in retail delinquencies once the moratorium expires on September 1.

The impact of pay cuts and job losses, a disruption in collections and also the masking of high-risk borrowers by the moratorium could all come together to increase the stress in the retail segment, bankers and industry experts said.

On Tuesday, Kotak Mahindra Bank (KMB) managing director & chief executive officer Uday Kotak said small-ticket loans have been going through a rough patch in the last 30-40 days in terms of collections. The true picture of the quality of retail loans will only become clear at the end of the second phase of the moratorium, he added.

Earlier, IDBI Bank had said during a post-results interaction that in March after the lockdown, repayments were not forthcoming, especially in the retail segment. Bajaj Finance, too, said it was seeing delinquencies rising in all consumer segments, with a more pronounced impact seen in auto finance, where the bounce rate stood at 67-68% in April-May, up from the average of 24.2%.

While most people agree that there will certainly be a hit to the retail book, the quantum is hard to ascertain at this stage. Some institutions have been carrying out scenario-based modelling to estimate the impact. For instance, Experian Credit Information Company India (ECICI) did a study two weeks ago, looking at how retail portfolios performed after the global financial crisis (GFC). The company picked one of the asset classes which had performed relatively better in 2008-09 — home loans — and tracked it vis-a-vis macroeconomic factors prevailing now, Ashish Singhal, managing director, ECICI, said.

“We realised that if the deterioration in the macroeconomic factors was to the same extent which happened at the time of the GFC, we are looking at home-loan delinquencies in the next 12 months going up by 1.75 times the normal delinquencies. In case the macro factors deteriorate by 10% more than during GFC, we are looking at almost a doubling of the home-loan delinquencies,” Singhal said.

Obviously, unsecured portfolios are at even greater risk and banks are fine-tuning their own approach to the segment. Manu Sehgal, business development leader – emerging markets, Equifax, said, “Banks are also turning more cautious on the retail segment because pay cuts, job losses and disruption of income may affect the inherent creditworthiness of customers. As a result, a borrower who might have been creditworthy six months ago may cease to be so at the end of this period.”
Axis Bank has already said it has increased provisioning against unsecured personal loans and credit cards. The credit outstanding for the banking system in all categories of retail loans fell between March and April, suggesting that banks are limiting fresh disbursements.

The portfolios at greatest risk are consumer-durable loans and payday loans by NBFCs and fintech lenders. Last week, a report by CreditVidya stated that loan losses could shoot up by as much as three times in the unsecured retail space, hitting new-age fintech lenders the most. The mass-market segment, which includes migrant workers badly hit by the lockdown, could see delinquency rates double as the borrowers return to their hometowns and some jobs are permanently lost. Non-performing assets (NPAs) could treble. “Unlikely that consumers will let go of their savings to fulfil EMI obligations, when prospects for future income are poor,” the report said.

The traceability of some customers —migrant labourers as well as salaried young professionals who have returned to their hometowns amid the lockdown —has also become a headache for lenders. As these borrowers, most of whom have unsecured loans, cannot be found at their local address which happens to be the one given to the lender, these loans can be expected to go bad.

At the same time, some analysts say the situation may improve for some borrowers with the easing of curbs. Anil Gupta, vice-president & sector head – financial sector ratings, Icra, said, “The RBI moratorium to borrowers was extended by three months till August 31, and as the lockdown restrictions have been eased, the pace of recovery in economic activities will drive the improvement in repayment abilities of borrowers and the extent of impact on asset quality of banks.”

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