Banks that have bypassed India’s bad loans cannot escape the blockage

By Suvashree Ghosh

The last $ 1.6 trillion bastion in the banking sector in India is being tested for resilience as private lenders brace themselves for an erosion in loan growth and quality due to the corona virus.

The strongest private banks in the country – HDFC Bank Ltd., Kotak Mahindra Bank Ltd. and ICICI Bank Ltd. – had in recent years sidestepped the shockwaves that hit state-owned banks and lenders and put these sectors in difficulty. under mountains of bad debt.

But after issuing nearly two-thirds of the new loans in 2019, private banks have not been able to escape the effects of the freezing economy in India, which is expected to devastate many of their retail and corporate customers. If they respond now by curtailing new loans even to healthy borrowers, it will have serious consequences for the Indian economy and the rate at which it can emerge from the crisis.

“We expect a strong slowdown in credit growth and a deterioration in asset quality across all private banks,” said Saswata Guha, the head of financial institutions at Fitch Ratings in India. The individual impact “depends on their relative exposure to vulnerable small businesses and the risky unsecured retail segment,” Guha added.

The financial sector in India has been shaken by a shadow banking crisis that has fueled bad loans and culminated in the largest bank rescue in the country’s history. The corona virus struck when lenders were about to see signs of stability, forcing the Reserve Bank of India to further ease liquidity and bad loan rules to ensure that funds flowed through the economy.


Due to India’s lockdown – extended this week to May 3 – companies are struggling to keep their heads above water: unemployment rose to 23% in the last week of March and growth is projected to decline by about 5% in the current quarter, the first contraction in at least two decades.

The total number of non-performing loans in the financial system could increase by 7 percentage points if India ends lock-up in mid-May, according to a recent study by McKinsey & Co. At 9.3%, India already has the worst weighted asset ratio of any major nation.

According to a report by Credit Suisse Group AG led by Ashish Gupta, more than 25% of ICICI’s loan portfolio is targeted at sectors most vulnerable to lockdown, such as small businesses and auto financing. At Axis Bank Ltd. the share is 35%, the report said, while for smaller private lenders, IndusInd Bank Ltd. is even 45%.

For IndusInd, RBL Bank Ltd. and other smaller private lenders, the coronavirus crisis has also led them to struggle to hold on to deposits as funds migrate to the alleged security of sovereign debtors. Those private sector banks were already under pressure after the regulator withdrew deposits from Yes Bank Ltd. had been blocked as part of the bailout announced last month.

“The ability of private banks to withstand deposit shocks is critical to their survival, as a strong liability franchise is critical to a bank’s stability,” said Karthik Srinivasan, group leader of the financial sector at ICRA Ltd ., the local branch of Moody’s Investors Service.



Tight financing conditions at shadow providers and smaller private banks could force them to cut lending, Moody’s warned this week in a report. “As a result, companies that rely on either type of lender for financing, many of which have weak financial positions, will struggle to maintain liquidity, which can lead to loan defaults,” said Moody.

The reference index of private banks in India has fallen slightly more than 34% since the beginning of March, slightly more than the fall in the equivalent state bank index. That is a reversal from last year, when private banks rose 16% and public banks lost 18%.

Much of the historical outperformance of private banks has been based on their rapid growth in loans compared to their peers in the state sector, which have prevented them from taking out new loans due to a legacy of bad debt. But that gap is narrowing because even the largest private banks are raising their horns during the Corona virus crisis.

Credit growth at Kotak Mahindra Bank fell to 6.7% in the first quarter of the year, the slowest in at least three years and down 10.3% in the past three months. HDFC Bank, which has the lowest bad debt ratio among its peers, has also tightened on new lending, its director Aditya Puri said last month.

Some private banks are major lenders to private clients in India, a sector that until recently has been largely shunned by state banks, which target large corporate borrowers. That specialty could now haunt private lenders.

In addition to auto loans, the Credit Suisse report states that real estate, credit card and unsecured loans are particularly vulnerable during the corona virus crisis.

IndusInd’s retail portfolios include auto financing and microfinance that have “ gone through several cycles, ” a bank representative said in response to an email asking for comment. “We have demonstrated that we can effectively manage these portfolios” during disruptions, including the global financial crisis and the demonetization of India, he said.

The magnitude of the challenge for private sector banks should become clearer after Saturday, when HDFC Bank begins its last profit season to report results for the quarter ended March 31.

The RBI has given all banks a three-month grace period in which they have some relief from the rules for recognizing bad loans. But from September, bad loan rates are likely to rise if the crisis is still acute.

Private banks’ credit books grew 13% a year in December, more than three times the rate of state banks, according to RBI data. If asset quality begins to deteriorate, their bad loan ratios could rise from the 3.9% recorded in September, which was well below 12.7% for government borrowers.

“The longer Covid-19 lingers, we will face rising human costs, more companies will struggle, more livelihoods and bad loans will continue to grow,” said Ananth Narayan, a professor and expert from the financial industry who was recently appointed as additional director at Yes Bank after her rescue. “Even after the lockdown ends, it will be a long time before the economy returns to normal.”


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