A Third Of India’s Bank Loans May Remain Under Moratorium Till August End, Says Macquarie’s Suresh Ganapathy
“Overall, 1/3rd of the loan book will remain under moratorium by the end of August,” Ganapathy said.
A third of India’s bank loans are likely to remain under moratorium despite fewer people opting for payment relief during the three month extension provided by the Reserve Bank of India. That’s according to Suresh Ganapathy, analyst at Macquarie Capital Securities.
Private banks are likely to see a reduction in loans under moratorium—down to to a quarter from a third by August-end—as banks have become more cautious in offering the moratorium and are communicating the benefits of timely repayment to their borrowers. Public sector banks, on the other hand, may see it reduce to around a third of their total loan book from above 50% previously.
“Overall, one-third of the loan book will remain under moratorium by the end of August which is a reasonable outlook considering the initial fear of it being above 50%,” he told BloombergQuint in an interview.
The Reserve Bank of India, on May 22, extended a moratorium on term loan EMIs by three months to Aug. 31, 2020, in the wake of the economic disruption brought on by the Covid-19 crisis and a subsequent national lockdown. While private banks have reported that close to a third of their loan books went under moratorium, some state-run lenders and non-bank financiers have disclosed that a higher proportion of loans are on standstill.
India has the highest share of loans under moratorium, according to Goldman Sachs, because its relief granting conditions are less stringent than peers.
The more important figure to analyse, however, is what portion of these loans under moratorium turn into non-performing loans, Ganapathy said. “If I were to really look at this moratorium book as a restructured asset book which is what happened during the GFC (global financial crisis of 2008) almost 70-80% (could go bad). If you are looking at that kind of a number, then we’re really looking at a very bad scenario for the banking system,” he said.
Bad loans across the Indian banking system could rise to nearly 13-14% of total loans in the current financial year amid a rare contraction in Indian economy, showed data released by S&P Global Ratings. This would be the highest since 1999. The agency expects India’s real GDP to contract by 5% this year.
A substantial percentage of the accounts opting for moratorium could turn into bad loans, Ganapathy said, 10% being an optimistic assessment and 20% being a bear-case assessment. “That obviously will be very tough for the system to take in my view.”
Read the edited excerpts of the conversation:
What is your sense on whether the proportion of moratorium loans has come down?
The moratorium numbers are likely to come down from what we thought at the end of May. So in the second round of moratorium, there are a lesser number of people who are opting for it. People have not lost jobs to the extent that they thought they would. There have not been a massive amount of job losses in the white collar category, though the blue collar workers have lost jobs. Also, banks also have become a bit more cautious and a bit more informed, so there is better communication between the banks and the borrowers.
What is likely to happen here is that the moratorium number is most likely to come down by the end of August. Now will it come down significantly? I doubt it but there were initially fears that the numbers that we saw at the end of May could further rise. Those fears have been put to rest which is a positive thing at the margin and even a flat number is relatively okay, in my view.
So, we were working with a rough number of about a third of loans under moratorium and that was based on private banks. Is that the number you would be looking at even in say August?
For private sector, the number can come down by 5 to 10 percentage points so a third becomes say, one-fourth. Whereas for public sector banks, the numbers were about 50% and that can come down to a third or somewhere around that.
So overall, the number would still remain around one-third from a system perspective, which I think is a reasonable outcome considering that the initial fear was that it would be about 50%. Again, this is all guess work at this point in time, you don’t know how the situation pans out in July or the later part of July and of course in August. As of now it looks like it will be about 30%.
How are you reading into these numbers? There has just been such opacity on what we should make of it.
In the first round, a lot of people took the moratorium because they wanted to conserve liquidity. But in the second round of moratorium, the proportion of borrowers who took it for liquidity conservation would have been gone down. But new borrowers would have been added. Therefore the net number will still remain the same; that is 30%.
Having said that, I think, at the end of the day what’s more important is how much of this moratorium book turns bad. That’s where the most critical analysis needs to be done. Now if I were to really look at this moratorium book as a restructured asset book, which is what happened during the GFC, almost 70-80% went bad. If you are looking at that kind of a number, then we are really looking at a very bad scenario for the banking system.
How are you analysing these numbers? Are you looking at individual bank book, seeing wholesale versus retail proportion or industry proportion? What is the metric to use to understand the probability of slippage eventually into NPA category?
This is going to be tough because all banks don’t necessarily disclose the segment-wise book under moratorium. But my view here is that a larger proportion of the SME book will turn bad.
If we were to really look at the various other public sector bank numbers, for example, SBI disclosed that 47% of their SME book is under moratorium. Now, that’s going to be a bit more stressed in my opinion compared to say the retail category. So, at this point in time, it really looks like the SME book and certain sections of the retail book that are more likely to add to stress.
What’s likely to happen here is that the large corporates are not going to default, they are in a better shape and the proportion of large corporates opting for moratorium actually is in single digits.
The fact that we came through a very stringent corporate clean-up cycle has probably helped because unlike the last cycle where corporate banks were seen at risk, this time, from what you say, that is not true?
That’s true because what has happened is that most of the assets under the large corporate category which had to be recognised as stressed have already been recognised. So, to that extent, they’re not contributing because you’re not going to see a billion dollar or a $2 billion exposure going for a moratorium. Most of those assets are already shown as NPLs on the books of banks.
It is going to be the mid-corporate sector and, within that, certain sectors, in segments like real estate, which may be under stress. This is where I think there is a lot of clamor for one-time restructuring.
On retail you’re not entirely convinced that we’re in for a tough retail asset quality cycle?
I think unnecessarily people are getting worried about retail. There could be some problems incrementally, delinquencies will go up, but retail balance sheets are much safer compared to the SME balance sheets.
As an individual, you always have some hidden savings, you always have relatively lower amount of borrowing and the employability is relatively better. The real challenge could be on the SME front where the balance sheet, the leverage and two months of lockdown or two months of liquidity getting wiped out is very difficult to manage. So the liquidity risk is translating into solvency risk for an SME but I don’t believe that will happen for individuals. Eventually they will come back to the system and pay back the money and end up getting a job.
Is it possible that even if the top-tier banks don’t get hit, NBFCs who are lending to the lower credit score customers would be at risk?
Interestingly we have spoken to some of these large private banks, who are large ‘salary banks’. They have a large market share in the salary accounts category. They do check the salary uploads into the overall system and what they found is the salary upload for April was 5% down over March, and the salary uploads for May was flat over April. In other words, the total salary uploads were only down 5 to 7% over March number.
In other words, the white collar job segments were relatively stable otherwise this decline could have been in double digits. So, 5 to 7% decline in salary uploads is fine. People would have lost some jobs here and there and some salary cuts would have happened. But things are not that bad; at least among the top-tier private bank customers.
The real problem could be lenders who catered to customers a couple of notches below these customers. For example in an NBFC, catering to the commercial vehicle segment, there could be massive amount of issues when it comes to the retail asset quality. To some extent this is already reflected in the book under moratorium. The moratorium numbers for the NBFCs are 60-70%, almost double that of banks.
On the capital side, we’ve seen some banks already raise capital, some saying that they are looking to raise capital. Should this be seen as pre-emptive or opportunistic or a regulatory push?
I think the interpretation is a combination of two which is basically banks trying to be extra cautious and trying to take the money when it is available.
We have seen in the past when banks have become pretty greedy about the price they want to raise money at and then waiting for that opportunity and finally the opportunity never arrives. So if liquidity is available in plenty why shouldn’t we go to the market and raise money? And you take a five year view not a six month view. So, the private sector banks take that kind of view and they are looking at it from the longer term perspective and they take the money when it is available. That’s one way of looking at it.
Second, let’s admit that we are living in unprecedented times. Nobody knows how the Covid situation is going to pan out; look at the second wave of cases which is happening in Spain and France and everywhere once the lockdown has been opened. India is just opening up and we are a community where social distancing is something which is going to be a utopian concept, it becomes very difficult to achieve. So, things could get worse before they become better.
In that environment if today the market is going to give you money and you don’t know how this situation is going to pan out, then you take some of this money to provide for the bad assets. It is a combination of these two in my view.
Regulatory nudges? Yes I mean RBI is happy if the banks do raise a larger amount of money, so indirectly they say don’t pay dividends and preserve capital-based pay-outs. But I think the first two reasons are more plausible.
So who emerges the winners in this? The folks who are able to raise the capital up front and then be ready for a growth phase? Is that pool shrinking further? If a year and a half or two years back it was seven or eight high growth, strong asset quality banks. Now you can count them on one hand.
This is turning out to be like the model in the US, where the respective large ones in each category — banks, NBFCs, life insurance — the top four or five are going to dominate. We can see that here too.
It is clearly evident that the public sector banks have been stressed for a long time. These are a whole lot of old private sector banks that have a problem like Dhanlaxmi Bank or Lakshmi Vilas Bank.
So, it’s going to be very clearly the large private sector banks or the large ones in each of these categories that will become bigger. Also what they’re trying to do is very smartly they have tried to beef up the deposit base and are using different opportunities to build a stronger and a more robust liability construct. So that when the opportunity comes in, you really start dominating the space.
What about public sector banks? Is SBI now the lone wolf or are you still hopeful of some of the banks one layer below SBI being able to ride out this crisis as well?
I hope so. This is what I’ve been arguing with a lot of clients that you may argue that HDFC Bank has become bigger than ICICI Bank but at the end of the day, when any large infrastructure project comes in when the capex cycle picks up, you will need multiple lenders in the system to diversify the concentration risk.
Two or three banks cannot take care of a entire large project requirement. You need an SBI, you need a PNB and more. So I don’t want SBI to be the lone wolf. We definitely need two-three other public sector banks. Do we need 15 public sector banks? The answer is no but what do we need 5 to 6? Yes, definitely. We need a healthy public sector banking system with five or six banks who can participate and kick start the cycle as and when it begins.
There are reports of a one-time restructuring plan been designed. Should we stay away from this?
I think RBI, going by experience, should be very careful because I don’t think they should allow blanket restructuring.
If you were to look at the 2008 experience, it was complete blanket restructuring across all asset classes. So, I don’t think they should go for anything like that. It can be sector specific but it should come with a lot of safeguards.
We did an analysis that almost 50-90% of the restructured loans went bad, depending upon what lag you take into account from an analysis perspective. So I think banks do misuse and abuse the rule. The CEOs of public sector banks keep retiring every two years and they want to show good numbers so they restructure the loans. There can be a whole lot of moral hazard arising out of restructuring.
Therefore, if you look at it, RBI has been reluctant to go down that route. They announced a moratorium but they didn’t go for a restructuring announcement immediately. You have to be very sector specific and provide relief to the sectors which are affected by Covid-19 and where the recovery could be two years away. For instance, hospitality or aviation or commercial real estate, but, as I said, with a lot of safeguards and checks built in.
Is there any sense in the argument to just extend, for a short period of time, the NPA recognition to 180 days rather than 90 days?
No I think once you move from 90 to 180-days, you may never know how the behavior could change, both from the customer as well the bank. We think it would be a very regressive approach. I mean incrementally, if we were to look at NBFCs, they had 180-day NPA recognition and that moved to 90-days. Banks have gone down from 360-days once upon a time to 180 and now 90-days. Going back to 180 days would just not be allowed.
I understand that unfortunately now IBC is also not operating and therefore banks are really struggling and to some extent restructuring is one way of trying to solve the problem. But relaxing the NPA recognition norm is just not a good idea. Progressively, we have to move towards IFRS, which takes into account one-day, one-rupee default. If your objective is to move towards IFRS, there is no way you should go from 90 to 180-days. That is taking a couple of steps backwards.
There is talk of a a push towards privatisation, including in banks. Do you think this is a good time to push forward? We’ve already seen mergers. Now, if we put a few banks up for privatisation does it do anything? Does it get the requisite interest?
They have been trying to privatise IDBI Bank and that’s not worked at all. Who is going to buy a public sector bank? I mean, you want it to be privatised but look at the privatisation of Air India. So, this doesn’t work. So, we can talk about it but unfortunately the structural issues are so big that whatever might be your intent, unfortunately it is not going to work at least for the foreseeable future.
Leave us with some red flags that you’re watching out for?
I think one of the biggest high frequency number to look at is credit growth. You cannot have an economy with 6% credit growth. What kind of economic recovery are we are talking about with that kind of credit growth? People are going gaga that the lockdown has opened and rural economy is firing on all cylinders and credit card spends have come to 80-90% of takeover levels. Then why is credit growth running at 6%?
It could be the supply issue or it could be the demand issue. The reality is that it is a combination of both. But unless and until credit growth picks up, what kind of economic recovery are we talking about?
In simple words I always keep questioning what kind of loan-less, jobless growth is this? So you have to look at the loan growth number and unfortunately it is not looking good.