The impact of the coronavirus pandemic and the nationwide lockdown is raising concerns about the health of India's banking sector, which was wobbling under a mountain of bad debt even before the outbreak.
Analysts are now predicting a wave of loan defaults this year as companies go out of business because of pandemic-related shutdowns or struggle to service their debts amid reduced income.
“The economy is going through a very troubled time and I think we will see a lot more stress going forward,” says Jimeet Modi, founder and chief executive of Mumbai-based Samco Securities. “A lot of the stress will be contributed by small and medium-sized businesses and the banking and financial services sector. We expect a lot of SMEs will end up defaulting on their loan and interest repayments, which will create a vicious cycle and further difficulties for banks and non-banking financial companies.”
India's banking sector has been struggling with ever-increasing levels of bad loans, triggered by a series of defaults by corporations, individual clients, and other smaller businesses over the past few years.
Authorities had taken steps to strengthen the ailing banking sector and tighten lending practices in Asia's third-largest economy. These included mergers of state-run banks and placing several lenders on the watch list of the country's central bank – the Reserve Bank of India (RBI).
The aim was to help struggling institutions improve their balance sheets. However, despite corrective measures, India, with its $190 billion (Dh697.3bn) of bad loans, overtook Italy to become the major global economy with the worst non-performing loan ratio, according to Bloomberg, which cited data from the RBI.
Now, with the coronavirus pandemic hitting the global and local economy and a nationwide lockdown, which has been in place since March 25, it is inevitable that there will be more pain in store for the country's financial institutions, analysts and business leaders say.
“The banking sector already grappled with many issues including rising NPAs [non performing assets], a liquidity crunch and under-capitalisation,” says DK Aggarwal, the president of India's PHD Chamber of Commerce and Industry. “The onset of Covid-19 has further aggravated the issues and concerns for them as they may witness a hike in credit costs and limited disbursement of loans to various segments of economy.”
Some analysts say the slow progress made over the years to clean up India's banks could be derailed with the latest crisis.
“The pandemic has brought most businesses to a halt,” says George Alexander Muthoot, the managing director of Muthoot Finance, a Kerala-based gold financing company.
“Most people were forced to stay at home and demand for goods and services has dwindled. The banking sector has faced a certain amount of problems due to the credit crunch even before the pandemic [hit]. All businesses are [now] in the process of rewriting their business strategies.”
Prime Minister Narendra Mod's government last month unveiled a $266bn economic package, but economists say the stimulus is more focused on long-term measures, rather than putting cash directly into the hands of businesses. The government package also includes provision of credit for businesses, but that relies heavily on lending by state-run banks, and the government has yet to put money into those lenders.
Analysts agree that right now it is extremely difficult to estimate the impact on the banking sector given the ongoing uncertainty surrounding the pandemic. India reported 11,000 new Covid-19 cases in a single day on Saturday, brining the total in the country to more than 300,000. More than 8,800 deaths from the virus have also been reported according to the Johns Hopkins University, which is tracking its spread.
“I think no one knows the answer,” says Yuvraj Choudhary, a research analyst at Anand Rathi Securities in Mumbai. “Bankers, top management, even the customers themselves, they don't know what will be the end impact of this whole lockdown situation.”
In the case of some banks, 30 to 40 per cent of their customers have applied for moratoriums on their loans.
“These businesses may have applied for the moratorium out of financial distress or it may just be a precaution,” says Mr Choudhary. “There is a set of customers who have applied for moratoriums because their business is not doing well and that is a problem.”
In recent weeks, India has relaxed some restrictions that were part of its nationwide lockdown in a effort to revive the economy.
But many businesses have yet to reopen, and some that are open are struggling to get the labour they need after the vast majority of migrant workers fled cities to return to their home towns. Subdued consumer demand for all-but essential goods amid the pandemic is another factor hurting businesses.
Goldman Sachs expects India's GDP to contract by 5 per cent in the current financial year due to the pandemic. The economy could shrink by as much as 45 per cent in the April to June quarter, according to the investment bank.
With such a gloomy economic outlook, lenders are reluctant to start handing out loans to many sectors, which means that businesses will struggle to access much-needed credit, experts say.
“The Covid-19 and resultant lockdown has impacted the resilience of the banking sector in form of a liquidity crunch,” says Mr Aggarwal. “Going ahead, prolonged financial sector weakness could weigh on credit growth, economic output and investment and productivity in the coming times. The health of banking sector is going to be worrisome if their lending activities are not boosted.”
"We expect a lot of SMEs will end up defaulting on their loan and interest repayments, which will create a vicious cycle and further difficulties for banks and non-banking financial companies," says Jimeet Modi, founder and chief executive of Mumbai-based Samco Securities.
Mr Choudhary says that lenders are trying to be as prudent as possible. For example, pharmaceutical and fast-moving consumer goods sector companies are more likely to be able to secure loans than businesses in the travel and hospitality industries, which are the hardest hit by the pandemic.
The non-banking financial sector crisis that erupted in 2018 is another issue weighing heavy on banks. The extent of their troubles came to the fore with the collapse in March of India's fourth-largest private sector lender, Yes Bank, in March. The State Bank of India led a 100bn rupee (Dh4.87bn) bailout package to rescue the lender, which buckled under a heap of bad debts, when non-financial banking and real estate companies defaulted.
Analysts say in the current scenario more support will be needed from the authorities for the banking and broader financial services sector as India tries to revive its economy.
“Recapitalisation of banks will be required" to restore the balance sheets of under-pressure lenders, particularly publicly-owned banks, says Mr Aggarwal.
The RBI has already delivered two emergency interest rate cuts since the lockdown began and also announced measures to address liquidity constraints. But the help extended so far is not enough.
“I do believe the government will have to be ready to support public sector banks with capital,” said Uday Kotak, the founder of Kotak Mahindra Bank, Bloomberg reported. “My advice to both private-sector banks and non-bank financial companies is: make yourself stronger, fortress your balance sheets. And if that means raising capital, go ahead and do it.”
Kotak Mahindra Bank has raised almost $1bn over the past few weeks through the sale of shares to boost its own balance sheet.
Work is also continuing to manage the long-term health of the sector.
On Thursday, the RBI proposed stricter governance rules for commercial banks. These proposals include limiting how long a major shareholder can serve as chief executive to 10 years, and drawing up clear divisions of responsibilities between a bank's board and management.
The RBI is also setting up an internal working group to review its guidelines on the ownership and governance structure of private sector banks.
In the near term, analysts say it is in the government and RBI's interest to do whatever it takes to support the banking sector through the pandemic.
“The financial sector is the heart of the economy,” says Mr Choudhary. “I don't think any of the banks in India will be allowed to fail.”
Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
The National Archives, Abu Dhabi
Founded over 50 years ago, the National Archives collects valuable historical material relating to the UAE, and is the oldest and richest archive relating to the Arabian Gulf.
Much of the material can be viewed on line at the Arabian Gulf Digital Archive - https://www.agda.ae/en
THE BIO
Bio Box
Role Model: Sheikh Zayed, God bless his soul
Favorite book: Zayed Biography of the leader
Favorite quote: To be or not to be, that is the question, from William Shakespeare's Hamlet
Favorite food: seafood
Favorite place to travel: Lebanon
Favorite movie: Braveheart
Gifts exchanged
- King Charles - replica of President Eisenhower Sword
- Queen Camilla - Tiffany & Co vintage 18-carat gold, diamond and ruby flower brooch
- Donald Trump - hand-bound leather book with Declaration of Independence
- Melania Trump - personalised Anya Hindmarch handbag
Gender pay parity on track in the UAE
The UAE has a good record on gender pay parity, according to Mercer's Total Remuneration Study.
"In some of the lower levels of jobs women tend to be paid more than men, primarily because men are employed in blue collar jobs and women tend to be employed in white collar jobs which pay better," said Ted Raffoul, career products leader, Mena at Mercer. "I am yet to see a company in the UAE – particularly when you are looking at a blue chip multinationals or some of the bigger local companies – that actively discriminates when it comes to gender on pay."
Mr Raffoul said most gender issues are actually due to the cultural class, as the population is dominated by Asian and Arab cultures where men are generally expected to work and earn whereas women are meant to start a family.
"For that reason, we see a different gender gap. There are less women in senior roles because women tend to focus less on this but that’s not due to any companies having a policy penalising women for any reasons – it’s a cultural thing," he said.
As a result, Mr Raffoul said many companies in the UAE are coming up with benefit package programmes to help working mothers and the career development of women in general.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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