As cases increase, tighter movement restrictions may be introduced, which will affect the ability of industries to issue refunds
Like the rest of the world, the banking sector is keeping a close eye on the pandemic. In the week ending January 9, India recorded 6,382,872 cases, which is a six-fold increase from the 1,032,330 cases recorded in the week ending January 2. As cases increase, and with them deaths, bankers fear it can lead to a substantial increase in bad debts.
The first and second waves of COVID, seen in 2020 and 2021, have wreaked havoc on the economy. However, most economists say the third wave is likely to have a lesser impact on the economy for three key reasons: increased vaccine coverage, the improbability of a severe and complete lockdown, and better preparedness of industries and public.
Still, Indian banks, whose balance sheets have already been hit hard due to a spike in non-performing assets (NPAs), could face tough times again. As it stands, credit withdrawals fell to 43,484 crore yen in December from 1,18,951 crore yen in November 2021, media reported. Bankers do not expect a significant drop in lending in the future. But they fear that the repayment capacity of loan takers will be eroded if governments across the country introduce stricter movement restrictions than those currently in place.
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Rating agency ICRA said in a report, cited by PTI, that the threat of a third wave of COVID poses high risks to the quality of banks’ assets. He sees a 15 to 20 basis point increase in borrower restructuring requests due to the latest wave of the pandemic.
How COVID fuels NPAs
The pandemic and the disruptions it brings in its wake are leading to the full or partial closure of retail establishments, shopping malls, theaters, restaurants, etc. For example, the weekend curfew in Tamil Nadu is expected to significantly hurt Pongal’s sales. This means that the ability of traders and entrepreneurs to pay their loan installments is affected.
A longer third wave period could also lead to job cuts, as happened in 2020. If this happens, individuals might not be able to pay their Equivalent Monthly Payments (EMIs).
The Reserve Bank of India (RBI) Financial Stability Report indicated that banks’ gross NPA (GNPA) ratio could climb to 8.1% in September 2022, from 6.9% in September 2021 under the scenario of reference. It could even rise to 9.5% in September under a severe stress scenario, he added.
The RBI, since the onset of COVID, has opted for an accommodative monetary policy and kept repo rates unchanged. This might not be sustainable in the long run as it could lead to inflation, economists warn. Therefore, if the RBI introduces a hike in interest rates, the NPAs may rise.
However, most economists and industry players believe the central bank is unlikely to do so until the third wave wears off.