Banks fear spike in bad loans fuelled by COVID third wave

Like the rest of the world, the banking industry is keeping a wary eye on the pandemic. In the week ended January 9, India saw 6,38,872 cases, which marked an over six-fold rise from the 1,02,330 cases recorded in the week ended January 2. As the cases surge, and with them the fatalities, bankers worry that it may lead to a substantial increase in bad loans.

The first and second waves of COVID, seen in 2020 and 2021, played havoc on the economy. However, most economists say the third wave will likely impact the economy lesser for three key reasons: the rise in vaccine coverage, the improbability of a severe, complete lockdown, and greater preparedness among industries and the public.

Yet, Indian banks, whose balance-sheets have already taken a hard hit due to a spike in non-performing assets (NPAs), may be in for tough days again. As it is, credit offtake fell to ₹43,484 crore in December from ₹1,18,951 crore in November 2021, said media reports. Bankers do not expect a sizeable decline in credit offtake going forward. But they do fear that the ability of loan-takers to repay may be eroded if governments across the country introduce more stringent movement curbs than what are currently operational.

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Rating agency ICRA said in a report, quoted by PTI, that the threat of a COVID third wave presents high risks to banks’ asset quality. It sees a 15-20 basis point rise in restructuring requests from borrowers due to the latest wave of the pandemic.

How COVID fuels NPAs

The pandemic, and the disruptions it brings in in wake, lead to complete or partial closing down of retail establishments, malls, theatres, eateries and so on. For instance, the weekend curfew imposed in Tamil Nadu is expected to hurt Pongal sales in a big way. This means the ability of traders and entrepreneurs to pay their loan instalments is affected.

A longer spell of the third wave may also lead to job cuts, as was witnessed in 2020. If this happens, individuals may not be able to pay their equated monthly instalments (EMIs).

The Reserve Bank of India’s (RBI) Financial Stability Report has said the gross NPA (GNPA) ratio of banks may climb to 8.1% in September 2022, from 6.9% in September 2021 under the baseline scenario. It may even go up to 9.5% this September under a severe stress scenario, it added.

The RBI, since the onset of COVID, has gone for an accommodative monetary policy and kept repo rates unchanged. This may not be sustainable in the long term since it could lead to inflation, warn economists. Hence, if the RBI introduces a hike in interest rates, NPAs may surge.

However, most economists and industry stakeholders believe that the central bank is unlikely to do so till the third wave tapers down.