Coronavirus poses new threats to Indian banks buckling under mounting bad loans

Banks could see 'far reaching' impact as industries and businesses struggle to stay afloat amid the coronavirus lockdown

FILE PHOTO: People wait outside a Yes Bank branch to withdraw their money in Ahmedabad, India, March 6, 2020. REUTERS/Amit Dave/File Photo
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Saddled with a slowing economy and a mounting heap of bad loans, India's banking sector is facing a new threat: the coronavirus pandemic that can seriously shake the foundations of struggling lenders in Asia's third-largest economy, analysts say.

As the spread of the virus impacts businesses amid shutdowns and severe disruptions to travel and trade, Indian lenders now have to deal with a whole set of new problems.

“Of late, the banking sector had started to show some signs of recovery,” says Ajit Mishra, the vice president of research at Religare Broking in New Delhi. “However, the outbreak of the virus seems to have put the banks on a back foot again and there are worries that non-performing assets may increase and loan book growth will also be impacted.”

Lenders in India are grappling with a number of issues, particularly the pile of bad debt that the sector has accumulated over the years. Major corporations, individuals clients and other relatively smaller businesses have defaulted on loans, forcing lenders to write off $30 billion (Dh110bn) of bad debt in 12 months to the end of June. The move has reduced the total amount of bad loans on lenders' books by 8.5 per cent, according to date from the Reserve Bank of India, cited by Reuters.

“The present coronavirus situation would be a huge disruption in the semblance of stability, which the Indian banking sector had achieved in relation to its borrowers,” says Veena Sivaramakrishnan, a partner and banking specialist at Shardul Amarchand Mangaldas, an Indian corporate law firm. “For banks which were already under stress, this would just be an additional challenge, which may be difficult to tide over. Certain industries such as power, textile, infrastructure and real estate, which have been on a downward trend and are solely dependent on labour, would continue to further deteriorate and increase the stress in the banking system.”

The non-banking financial sector crisis in India, which stems back to 2018, is another issue affecting lenders. The extent of these woes have come to the fore with the collapse this month of India's fourth-largest private sector lender, Yes Bank, which was put under the RBI administration. The State Bank of India led a 100 billion rupee bailout package for the lender which collapsed under a heap of bad loans from its exposure to troubled non-financial banking and real estate companies.

The present coronavirus situation would be a huge disruption in the semblance of stability...

Yes Bank reported a loss of $2.51bn in the quarter to the end of December. The failure of a private lender in India is a worrying sign for the banking system on the whole as the problem of bad loans was previously associated with state-run lenders.

“The Indian financial sector has seen several crisis events in the last few years,” says Meghna Suryakumar, the founder and chief executive of Crediwatch, a data analytics company. “These have brought to the forefront, severe systemic issues at the heart of the banking sector in the country. The scare from Covid-19 has thrown the system in a fix. While the government is taking prompt measures to contain the spread, we believe the impact of this crisis event is going to be longer than expected.”

Even before the global coronavirus outbreak, India's economic growth was slowing down amid weak consumer demand and falling private investment. In the three months to the end of December, India's GDP growth hit a near seven-year low of 4.7 per cent.

The virus has weakened economies globally, and for India, Fitch Ratings on Friday slashed its growth forecast to 5.1 per cent from a previous estimate of 5.6 per cent for the financial year, starting April. The fallout of the pandemic is most severe for Indian manufacturers who depend on supplies from China.

The number of confirmed cases of coronavirus cases has risen in recent days in India, although the official numbers remain relatively low at 258 cases and four deaths, according to figures released on Saturday morning by the health ministry. However, limited testing in the country means the numbers may be far higher, medical experts say.

In recent days, authorities have stepped up efforts to combat the spread of the virus, including bans on large public gatherings, temporarily shutting malls and schools, and restricting travel into the country. In the financial capital, Mumbai, the state government has ordered a shutdown of offices and all non-essential businesses.

"While the scenario has already been worrisome, the arrival of the coronavirus has made the situation even worse," says Nitin Shahi, the executive director at Findoc Financial Services.
"The banking sector over the next two quarters is expected to have a tough time. With complete lockdowns and shutdown of factories  and sectors like entertainment and tourism not working at all, there is a possibility of new NPAs [non-performing assets] in these sectors. Small businesses, which are short on cash, will take the biggest hit due to the coronavirus."

He says that there could be significant job losses, which could lead to consumers being unable to pay off loans, which would also hit the banking system.

The weakness of the rupee is also proving to be a challenge for importers in particular. Mr Shahi says it increases the cost of goods they need that are priced in US dollars.

The Indian rupee has slumped to an all-time low amid the coronavirus fears and is trading at around 75.20 against the dollar. Stock markets have also plunged. Last week, they suffered their steepest weekly loss in a decade.

Small businesses, which are short on cash, will take the biggest hit due to the coronavirus

The RBI, in the meantime, is trying its best to reassure the market. On Monday, the central bank governor, Shaktikanta Das said saying "the RBI has several policy instruments at its command and stands ready to take all necessary measures to ensure that the effects of Covid-19 pandemic on the Indian economy are mitigated and financial markets and institutions in India continue to function normally".

The RBI has launched US dollar rupee swap and long term repo operations, in a bid to boost liquidity in the system. Market analysts expect RBI may announce an emergency interest rate cut, a step in line with other central banks around the globe. 
"While central banks from other economies have cut policy rates significantly to fight ongoing crisis, by not cutting rates in a knee-jerk reaction this week, the RBI seems to keep this ammunition in hand for the monetary policy committee meeting in the first week of April," says Ms Suryakumar.

Although Mr Das on Monday also stressed that “the Indian banking sector is sound and safe”, market observers, including Mr Shahi, say the RBI has little control over the situation.

The RBI, Mr Shahi says, should implement a rate cut of 0.50 to 1 per cent as an emergency measure and make sure lenders pass on that benefit to industries trying to cope with the impact of Covid-19.

The RBI “should also make sure that dollar prices remain in limits, by intervening in the currency markets as and when required”, Mr Shahi adds.

“We expect the next few quarters to be challenging,” according to Mr Mishra. “However, if the government and RBI provide some relief in the form of relaxation in NPA recognition norms for banks and facilitates more liquidity, the recovery can be faster.”

Given the spread of the coronavirus and the toll it is already taking on industries in India, “there is certainly more to come” from the RBI, says Ms Sivaramakrishnan of Shardul Amarchand Mangaldas law firm.

But she warns there is still limited visibility and the overall impact on the country's banking sector still remains to be seen.

It will be “far reaching and the statistics that the banks will report for the months to come will reflect how severe the impact has been”, she says.