The moratorium has been extended by another three months and, hence, a clear picture, on whether these accounts will remain standard or not, will emerge only towards the end of the year
The moratorium, extended to all bank customers, as per RBI’s March announcement, had raised some issues; these have been answered, to an extent, in the latest Financial Stability Report (FSR). There was no firm data concerning how many loan-account-holders availed of the moratorium and the overall value of outstanding credit reserved for this. There was ambiguity regarding whether or not this was automatic or whether one had to opt for it. There was strong messaging from the government that it had to be automatically offered to all customers, while the borrowers often complained that they had to ask their bankers.
The data provided in the FSR is interesting. The accompanying table shows that around half of the outstanding loans were under the moratorium, which also covered 55% of customer accounts. Given that outstanding credit in the system was Rs 104 lakh crore (includes farm loans too) as of March 2020, a sum of up to Rs 45 lakh crore, or around 22% of India’s GDP, is, thus, under the moratorium. (this was offered to all standard assets as of March 1, which was above 90% as of March-end). This shows the effect of lockdown on the economy, with half the borrowers preferring to opt for this facility. Indeed, even the borderline companies that could have serviced their loans went for the moratorium owing to the uncertainty of future cash-flows, but this shows that such loans can be considered vulnerable to differing degrees.
The highest share of o/s loans is, quite expectedly, with the SMEs, and this should be a cause of worry. SMEs were adversely affected by demonetisation and GST, now lockdown has added to woes. Even after this scheme ends, the government will have to announce a restructuring scheme for this segment.
The other revelation is that, in all segments, the share of outstanding loans that have sought moratorium is higher than the share of accounts, which means that it is the relatively larger ticket-size borrowers that are under stress.
Only in the case of individuals is the differential low as the ticket-sizes tend to be normally homogenous across the board. Banks, hence, need to take a closer look at the bigger tickets in the corporate segment as they could potentially be trending towards becoming NPAs. And, as some segments like hospitality, airlines, media, tourism, construction, and real estate are still to recommence activity—some may even take another six months—a rigorous monitoring policy should be in place.
The retail loans would also be a concern as PSBs, in particular, had moved more aggressively into the mortgage segment with the pressure of affordable housing being an overriding factor. Now, anyone taking a moratorium here would be in an extremely challenging position compared to say a corporate. Job-loss or a salary-cut would typically increase the probability of not being able to service the loans. Here, the situation will not change during the year. In case of corporate loans, with the unlock phase being in force, it may be possible for companies to recover. In the case of personal loans, this may not be the case.
For FY20, RBI has pointed to an NPA ratio of 2%, which can rise sharply in the coming year once the classification norms are normalised. The affordable segment will be the most vulnerable section as the loss of jobs has already affected or will impact the lowest-income group. In fact, a section of the migrant labourers who have gone back to their hometowns in rural India would also be covered here.
The other interesting bit revealed by the data is the residency of these loans across the different categories of banks.
The overall picture on loans under moratorium has been skewed by the PSBs, as shown in the accompanying graphic. Two-thirds of their accounts and loan-value are now covered under the moratorium. This is much lower for the private and foreign banks. Several conclusions can be drawn from this.
First, the government may have nudged the PSBs to be more aggressive in getting customers to opt for the moratorium. Affordable housing, too, has been high on the agenda of the government. Second, PSB accounts are clearly more stressed than others, something that gets revealed in the NPA numbers as well. With a high impaired-assets ratio, it is but natural that the more vulnerable accounts would be in their portfolio relative to other banks. Third, for foreign and private banks, the difference between the percentage of accounts and outstanding loans is quite stark, with the share of customer accounts being higher than those held by debt. This means that typically the smaller tickets have gone for the extension and the bigger accounts have not.
Hence, the number of accounts seeking moratorium is higher than that by value. Fourth, a corollary, the non-PSBs have better quality of customers, which is buttressed by the fact that their NPA levels are much lower. Therefore, their customers tend to be financially stronger, and thus have not opted for this facility. They have been choosier when picking their customers.
Interestingly, for the small finance banks, 85% of the accounts covering 63% of the o/s are under moratorium. Here, it is the smaller tickets that are under pressure. For urban cooperative banks, it is the reverse with 57% of accounts and 65% of the value being under moratorium. The same is seen for NBFCs, where 29% of the accounts and 49% of outstanding have opted for this facility.
The moratorium has been extended by another three months and, hence, a clear picture on whether these accounts will remain standard or not will emerge only towards the end of the year. This is a global problem and can lead to an increase in the set of impaired assets at a later date. The clue is to restart the economy as soon as possible so that the enterprise can get back to work and start earning revenue. For individuals who are working with pay-cuts or are out of work, the situation is unsatisfactory, which will finally show on the books of banks. Will the government be forced to announce waivers in future?