India Ratings and Research (Ind-Ra) opines the stimulus measures announced by the Reserve Bank of India (RBI) to tackle the second covid wave would help contain the pressure on the banking system’s asset quality, especially for micro, small and medium enterprises (MSMEs) and retail segment. Banks can also support the incremental credit needs of small businesses through a reassessment of their working capital requirement, though the system's propensity, in absence of external stimuli, could be tested as the perceived risk would be elevated amid the prevailing challenges. Consequently, both delinquencies (at least in 1QFY22) and the quantum of restructured assets could be higher than last year, given that there is no moratorium without restructuring.
Assistance to SMEs/MSMEs Continues through All Lenders: The RBI has permitted restructuring of MSMEs in line with the notification dated Aug.06, 2020; invocation can happen up to September 2021 and the implementation deadline is December 2021 for the entities with aggregate exposure of Rs 250 million. Even where the restructuring has already been completed under the same guidelines in FY21, moratorium can be extended upto to a maximum of two years. Banks are also permitted to extend similar forbearances to small businesses and individual borrowers.
Ind-Ra expects a spike in restructuring in small and medium enterprises (SMEs)/MSMEs and retail segments especially in the absence of a moratorium like in FY21. In the wake of these measures along with the Emergency Credit Linked Guarantee Scheme (ECLGS), borrowers could tide over temporary liquidity challenges, though slippages in unviable assets could spread over FY22-FY25.
By end-February 2021, Ind-Ra estimates banks sanctioned Rs 2.46 trillion to beneficiaries. Also, Rs 0.45 trillion of advances (with banking exposure of up to Rs 50 million) were restructured by end-March 21. These measures can also be extended by non-banking financial companies (NBFCs) and thus provide a breather to borrowers especially in the informal economy. Ind-Ra opines that non-banks especially in the vehicle finance, mid - large ticket loans against property and unsecured business loan segments would make substantial use of this provision.
SFBs Could Support Business Owners: Small finance banks (SFBs) have not lent substantially to small microfinance institutions (MFIs) for various reasons - from looking at them as competitors, to maintaining their direct /indirect exposures to microfinance and the fact that unlike mainstream scheduled commercial banks, SFBs' lending to MFIs was not considered priority sector. Under the RBI notification dated 5 May 2021, the RBI has allowed SFBs to provide incremental loans to MFIs with assets under management of less than Rs 5 billion to be classified as priority sector loans. This may be of modest help, given SFBs' past disinclination to lend to such MFIs. About 40% of the SFBs' exposure is towards direct microfinance (about 60% excluding AU Small Finance Bank (IND AA-/Stable) and Capital Small Finance Bank; the rest is to SMEs, MSMEs, unsecured and secured business loans, affordable housing, commercial vehicle, gold and two- wheeler loans.
Ind-Ra expects the SFBs and their borrowers from the non-microfinance segments to benefit materially on the back of special long-term repo operations where the quantum allocated is equivalent to about 10% of total SFB advances at end-December 2020.
Banks - Important Role in Non-corporate Segments: The countercyclical provision buffers for public sector banks at end-December 2020 were created in earlier part of the last decade and partially utilised in FY14 and FY15. These are usually not factored in the reported provision coverage ratios and hence could be marginally accretive for some banks. However, these at less than 0.1% of banks' advances are not material in quantum.
The RBI has also incentivised banks by allowing deductions in incremental loans to MSME borrowers from net demand and time liabilities for the calculation of cash reserve ratio. In addition, all the provisions announced for financing the vaccine supply chain and incremental lending to MSMEs are applicable to banks.
RBI to Aid System Liquidity and GoI's Borrowing Costs: The RBI will conduct a second round for purchase of government securities under G-SAP 1.0 on May 20, 2021 to aid system liquidity; it may also ease pressure on the yields on government securities aiding GoI's borrowing costs. The RBI has also said that if needed, more of such programmes will be carried out to meet the aforementioned objectives.
Expanding Priority Sector to Include Vaccine Assistance: Financing for the vaccine supply chain has been classified as priority sector for banks; Rs 500 billion of immediate liquidity would be made available for banks for a tenor of upto three years at a rate equivalent to RBI’s repo rate up to March 2022. Such banks would also be permitted to place their surplus liquidity at 40bp higher than reverse repo rates as an incentive. Nevertheless, the overall debt outstanding of the banking industry to the drugs and pharmaceutical sector was about Rs 0.5 trillion at end-March 2021, as per the RBI.
Retail Weakness Substantially Weeded out in FY21: Ind-Ra in its banking outlook has opined that in view of the 2x increase in retail stress (gross non-performing assets and restructured assets), banks especially over the last one year have tightened filters more so for new-to-bank customers and hence slowed down disbursements. This along with having no nationwide lockdown like last year could prevent a comparable stress in retail assets. In case of non-banks however, the stress and restructuring could continue to increase as regular accounts through last year could be impacted adversely for the second year.
