Indian Banks are staring at a wave of bad debt!

Indian Banks are staring at a wave of bad debt!

Last updated: 23 Jun, 2020 | 05:08 pm

Indian Banks are staring at a wave of bad debt!
  • The Indian banking industry is staring at a fresh wave of bad loans in FY21, as the disruption caused to business operations and supply chains due to the pandemic, has impacted borrowers’ ability to repay. 
  • The Indian banking industry had a respite from the NPA woes in FY19 when NPAs fell for the first time in seven years. It was set to come out strong from this NPA cycle but now with the advent of Covid-19, the industry awaits a fresh and much bigger wave of NPA’s.

Why will banks be affected?

  • Asset quality: While the pandemic has hurt business across industries, capital intensive and high fixed cost sectors such as aviation, real estate, consumer durables, and jewellery will find it difficult to repay loans, due to subdued demand, impacting the asset quality of Indian banks. 
  • GNPA’s to rise: According to ICRA, Gross non-performing assets (NPAs) of banks are likely to worsen to 11.3-11.6% by the end of this financial year from 8.6% as of March 2020, due to disruptions caused by the coronavirus pandemic. During the previous NPA cycle, GNPA% peaked at 11.20% in FY2018.
  • Moratorium: The Moratorium, where borrowers are not required to make any repayment on loans while interest may accrue, imposed by the RBI has now been extended to 6 months. This hurts the structure of Banking itself as banks match their long term debt repayments with short term customer inflows. Post Moratorium is where the pain will be most apparent when stressed borrowers may still be unable to pay back loans. Right now all the pain seems to be brushed under the carpet! Here is a snapshot of the moratorium status of some major banks and NBFCs.
  • Delay in recognition of NPA’s: The RBI said it will extend the one-time restructuring scheme for loans to  MSMEs till Dec 31. The recast scheme, announced in January last year, was to expire on March 31. This will prevent banks from classifying these stressed accounts as NPAs. Moreover, with the suspension of insolvency proceedings, (meaning the bank can’t force companies to liquidate assets to pay up,  against fresh cases for one year) and removing COVID related debt from the definition of default, banking provisions are expected to shoot up.

Banks are already bracing for the worst! 

  • Provisioning i.e money banks set aside for probable defaults on their loans have shot up across the board.
  • Large private banks have kept COVID related provisions at nearly 30-60 bps (of average loans) already, a number that is expected to go up further.
  • Most banks are also on a fundraising spree, not because they expect loans to grow but fearing they might need more capital for provisioning. Recently SBI notified that it will take shareholder approval to raise Rs 20,000 crores, Kotak Mahindra Bank raised Rs 7,442 crore via QIP. Yes Bank is also drawing up plans to raise additional funds.Here’s how much top banks of India have provisioned in just the latest quarter (Q42020).

Industry-wise debt breakup

  • The power sector, which was the main culprit of the surge in NPA’s during 2015-17, continues to have the highest amount of outstanding loans of  ₹566,556 crores followed by Iron & Steel. Barring telecommunications, all the other top borrowers have faced the brunt of the nationwide lockdown and the resulting demand slump.

INDwealth Analysis

  • The Indian banking space is about to be hit by a storm of NPA’s over the next year. 
  •  This sector is essential for the economy to bounce back. While the Government will pull out all the stops to ensure the sector remains healthy, banks with healthy financials will be well geared to weather this turbulent period.
  • Bank valuations have factored in some of the pain ahead but this is the time to stick to high-quality companies in this space for both Equity and Debt investments.
  • Private banks at current valuations and Quality metrics look more attractive than PSU Banks.

Our VGQM model has a BUY rating on HDFC Bank, HDFC, Kotak Mahindra Bank, ICICI Bank, and HDFC AMC