A lesson learnt from the shutdown is that we need to have in place a plan for every policy that is announced, especially so if it is temporary in nature. The idea of giving a moratorium was felt necessary in March. With all the extensions of the shutdown, enterprises have stopped operating for two months and would take at least another three months to commence operations while addressing the issues of labour and supply chains. The RBI has offered to extend the moratorium for all borrowers, which is necessary. But have we thought of what would happen when the rescue package comes to an end?
The TLTROs have had a limited impact, as banks have matched borrowings to risk. However, now that the FM programme gives a guarantee to loans for SMEs as well as NBFCs, the total lending here could go up to ₹3.75 lakh crore, with ₹45,000 crore having a partial credit enhancement.
The present level of NPAs could be in the region of around 9-10 per cent for March 2020. With the present crisis bringing growth down to a negative region, the level of NPAs will increase sharply. It may be hard to guess the number, as the course of moratorium is not known. It is possible that by March 2021, the borrowers will be asked to pay on schedule and banks recognise their asset quality. This would mean that there would be a sharp increase in NPAs, as negative GDP growth for the year would definitely mean that companies will not be able to honour their servicing obligations. On a conservative basis there can be 40-50 per cent increase in NPAs, which would push up the level to close to ₹14-15 lkh crore of outstanding credit of ₹107-110 lakh crore.
There would be multiple issues here. First is the provisioning, which has to be made by the banks. Here, the RBI could make some extensions, besides modifications in the way in which NPAs have to be dealt with, as the existing rule cannot hold given that banks will be handicapped with low growth in income (the accounting standards will face major disruption on how accrued income is treated, given that it may never come in). But at the end of the day, money lent and not returned has to be paid for by the system through provisions and write-offs.
Second, the NPA spread would be across all segments — probably barring agriculture. Services have been impacted quite sharply, especially trade, transport, hospitality, entertainment, and to an extent the smaller NBFCs. These industries are bound to face challenges. For the NBFCs, their ability to service will depend on how their clients perform, and this is where the problem will get blown up at the retail end. The high level of job losses and salary cuts means that individuals will have a problem in servicing their loans, which is serious as it can bring back memories of the 2008 Lehman crisis which germinated in the mortgage sector. This also has ramifications for the real estate sector, and while banks have less of exposure here, it is significant for NBFCs.
Third, the FM programme on providing guarantees to SME loans is noteworthy. Of the ₹3 lakh crore that has been spoken of assuming the NPA ratio is 20 per cent, which will be conservative as this segment is more impacted than others, there could be an amount of ₹60,000 crore that will not be serviced on principal, and maybe another ₹30,000-40,000 crore on interest. The sum of ₹1 lakh crore would have to be borne by the government as and when the accounting practices return to normal.
Fourth, the NBFC guarantee of lower rated bonds/loans would carry a lower quantum of risk, and hence the propensity to turn NPA would be lower than that of SMEs. This too would have to be considered by the government.
We need to be prepared for this. The RBI should draw up guidelines on rolling back of these rules on moratorium and NPA classification in advance and inform banks. It should not come to them as a surprise after, say, two years when like the AQR episode, the rules of the game change.
The government, on its part, should start making these provisions in the Budget and make the payments to banks, so that the latter are not held in suspension over the debt servicing of the guaranteed loans. By making these payments on time, it would serve the purpose better.
The writer is Chief Economist, CARE Ratings. Views are personal