Executives at HDFC Bank's headquarters in Mumbai were in for a surprise when they saw a large number of applications for availing the three-month moratorium announced by the Reserve Bank of India (RBI) to mitigate the impact of Covid-19. Most of the applications were from retail borrowers, who constitute more than half of the bank's loan book. A quick survey revealed that most borrowers were taking the moratorium out of caution and not due to financial stress.
Not very far away in Pune, the senior management team of Bajaj Finance, one of the country's largest non-banking financial companies (NBFCs), were working on three likely scenarios - in case the lockdown extends to 21 days, 41 days and 49 days, respectively - to lessen the impact of Covid-19 on its business and formulate a strategy to conserve capital, going forward. The NBFC, which has a large portfolio of consumer durables and auto loans, expects business as usual only by the fourth quarter of 2021/22, especially if the lockdown extends to 49 days, till May 15. "The company will be forced to take a harder view on operational expenses and explore a 12-15 per cent cut against the current 7-8 per cent," warned Rajeev Jain, Managing Director of Bajaj Finance, in an investor call earlier this month.
Clearly, the financial services industry, with an asset size of Rs 190 lakh crore, is approaching the coronavirus crisis in a clinical way to protect its balance sheet. Banks and NBFCs are conducting extensive in-house data analysis of moratorium seekers, especially in the MSME segment and for unsecured loans, including personal loans and credit cards."Risk departments are the most active now to build scenarios based on the likely behaviour of various sectors and customer segments," says Padmaja Chunduru, MD and CEO, Indian Bank. According to a rough study done by Business Today, loans worth over Rs 35 lakh crore would be under some sort of direct stress because of Covid-19. However, a number of banking professionals told BT that no loan is actually safe. "Which industry or sector is not impacted by coronavirus?," asks Sidharth Rath, Managing Director and CEO, SBM Bank (India).
So, the immediate focus of banks and NBFCs is to identify vulnerable assets (loans), build default probabilities, ready a collection machinery, make aggressive provisioning from profits, create liquidity buffers to meet redemptions, conserve capital and explore capital-raising options. State Bank of India (SBI) Chairman Rajnish Kumar even had an advice for businesses - avoid short-term borrowings. "It is advisable to go for a deeper restructuring because if people borrow for short term and are unable to repay on time, it will spoil their credit history," Kumar told entrepreneurs during a Zoom meeting.
While the banking sector's biggest worry is on the asset side (loans and advances), NBFCs, for the first time, are staring at a two-front war on both liabilities (funding side) as well as assets. Post the IL&FS debacle, NBFCs, which are one-fifth of the banking sector in terms of assets, faced only liquidity issues, while their assets or loan books remained largely untouched, barring a few exceptions.
NBFCs will now have to build liquidity buffers to prepare for a worst-case scenario of higher delinquencies because of non-salaried customers (at a time when layoffs are increasing by the day) and also keep enough liquidity to meet loan prepayment obligations, especially to commercial paper and debenture holders. In fact, there is unlikely to be a 100 per cent exit from the lockdown, and the business impact would easily last six to nine months.
"We are in an uncharted territory," says the CEO of a public sector bank. There are no past precedents to refer to and learn from. So clearly, the level of impact would only be known once there is a finality on the reach, the extent of damage and the duration of the Covid-19 impact. The casualty would be the Indian economy, which could take months to get back on track.
"Sitting today it would be very difficult to make a prognosis of the future situation," adds Krishnan Sitaraman, Senior Director, CRISIL Ratings.
Weak Assets: The Diagnosis and the Prescriptions
According to Sameer Narang, Chief Economist, Bank of Baroda, a large number of micro, small and medium enterprises (MSMEs) and corporate borrowers are availing moratorium. "It is natural because their revenues have slumped, but they still have fixed expenses to pay," he says.
A Mumbai-based large public sector bank is pooling in resources to track the past behaviour of moratorium seekers in stressed accounts with less than 90 days of default (also referred to as special mention accounts or SMAs in banking parlance).
"Banks are doing stress tests industry by industry. The impact on the airline or the hospitality sector, for example, will be more severe than retail or FMCG," says Rath of SBM Bank. Half of the banks retail customers are opting for moratorium.
At present, one-fifth of the banking industry's assets are parked in the retail space. "Nearly, 60 per cent of our customers in the affordable housing segment have paid their EMIs," says Ajay Kanwal, MD and CEO, Jana Small Finance Bank.
But the problem could come from the unsecured loan segment, where loans have gone to self-employed and other classes without any collateral. At present, the outstanding loan in the unsecured bucket is over Rs 8 lakh crore.
Saving New-age NBFCs and Fintechs
Founders of new-age NBFCs and fintech lending platforms are mostly professionals with limited capital.
In a post-Covid world, banks have turned their back on them. The public market borrowing window is not available to them as they are too small to get any interest from investors. That leaves them with private equity players and venture capitalists that have backed them. "But they are, too, return-oriented," says the founder of a fintech firm.
So, will these lenders to underbanked and underserved segments survive or perish?
"Every past crisis (The microfinance crisis in Andhra Pradesh or the financial crisis of 2008) has shown that a small or micro customer always fights back and comes out of the crisis. But bankers react by withdrawing credit since they turn risk-averse," says Manish Khera, Founder & CEO, Happy Money -- a lending Fintech firm.
According to Pramod Bhasin, Chairman of online lending platform Clix Capital, this is the time for bolder action, particularly opening up special credit lines and insurance for companies. Banks do not offer any moratorium to fintech firms and NBFCs, and these firms have no option but to accommodate their 'micro' customers in stressful times. "Book of fintech firms are very small with exposure to gig workers, the self-employed panwallah or the tea seller. Any exposure to them means an exposure in the unsecured space," says a consultant.
Such a situation is likely to lead to asset-liability mismatch. Prolonged lockdown and job losses would increase the delinquencies in asset portfolios. Shachindra Nath, Executive Chairman and Managing Director, UGRO Capital, says most vulnerable players are early-stage fintech firms and small-sized niche NBFCs. "We are reaching out to every platform that is value-accretive to us," he adds, hinting at consolidation opportunity.
Fintech firms are addressing the crisis by offering moratorium to borrowers and monitoring portfolios. They are also trying to reach out to banks and investors, even at a cost of paying a higher interest. "You have to be emphatic to them (customers) and extend help in these difficult times," says Nalin Agrawal, Co-founder and CEO, Snapmint -- an e-commerce and fintech start-up.
Banks are also studying possible scenarios over the likely payment behaviour of individuals and corporates post moratorium. There is a tendency of customers to default on a personal loan or a credit card outstanding than a home loan. In addition, this is typically the time when school fees, insurance premiums and tax payments are due, and people will set aside funds. Bankers are also focussing on collection through customer analysis of Covid-impacted geographies, including Maharashtra, Kerala, Uttar Pradesh and Rajasthan. For microfinance institutions (MFIs), the task is more difficult because their collections are mostly in cash and also door-to-door, which makes it more challenging. "We are readying our staff with a focus on hygiene and social distancing when they go out to meet customers tomorrow," says an MFI player.
Banks are also reaching out to customers via phone to find out the issues they are facing. Will all be able to pay the fourth instalment after the three-month moratorium?
In a note, Emkay Broking has said the deferment of EMIs disturbs the basic financial discipline of repayments, which will eventually be relatively difficult to normalise. While banks have time and again communicated to customers that this is not a waiver, but only a deferment, some are still not clear about the concept of moratorium.
Banks' MSME loan portfolio alone is around Rs 15 lakh crore. Also, auto loans to gig workers, logistics players and Ola and Uber driver carry a higher risk of default since many have gone back to their home towns, while others are jobless.
Then there are trends that are peculiar to the MSME sector, like delayed payments from large corporates. "Large companies may have to scale down production. Cash flow disruptions will lead to delayed payments to MSMEs, triggering credit defaults and permanent business closures of highly leveraged MSMEs," says Arun Singh, Chief Economist, Dun & Bradstreet.
Bankers are also evaluating the value of collaterals furnished by MSMEs, which is generally in the nature of loan against property. According to a JM Financial report, MSMEs constitute 10 to 20 per cent of the overall loan book of large private banks, while it is 24 to 50 per cent for smaller banks.
A higher provisioning for most of these affected sectors can also help banks avoid "future shocks". The RBI has already directed banks to make an additional provisioning of 10 per cent for two quarters for stressed accounts availing moratorium facility. "Provisioning requirements for banks can increase by Rs 30,000-40,000 crore because of stressed accounts under moratorium," says Karthik Srinivasan, Senior Vice President at rating agency ICRA. In addition, there are a number of cases stuck under the Insolvency & Bankruptcy Code (IBC), where there will be need for higher provisioning - from 50 per cent to 100 per cent - in case the company went into liquidation. Globally, Bank of America, Citigroup and Goldman Sachs have set aside billions of dollars for possible losses.
"There is a need for bringing back the debt restructuring schemes with NPA forebearence," says Chunduru of Indian Bank. Currently, banks can restructure loan accounts, but they will still be classified as non-performing assets (NPAs). NBFCs have asked the RBI for a one-time restructuring option without classifying loans as NPAs. Banks should be incentivised to support borrowers by way of guarantees, assured buy-back or credit enhancement in infrastructure projects.
Liquidity: NBFCs Gasping, Banks Flush with Funds
Banks and NBFCs are on two extreme ends in terms of liquidity. Banks are flush with funds and do not have enough options to lend it profitably. Some have cut deposit rates like SBI, for example, which reduced its savings rate to a historic low of 2.75 per cent per annum. Banks are resetting their fixed deposit rates downwards. Faced with low credit growth and risk aversion at this juncture, a large amount of liquidity is flowing back from banks to the RBI under the reverse repo window. Meanwhile, the deposit space vacated by large banks is offering a good opportunity to small finance banks and new private lenders like IDFC First Bank and Bandhan Bank to continue their premium pricing of deposits rates as their business model of high-yielding loan assets allows them a good interest margin. "We have seen some slowdown in deposit momentum post the Yes Bank fiasco. I would say getting the whole deposit momentum back will be our top priority," says Kanwal of Jana Small Finance Bank.
NBFCs are gasping for liquidity since they depend mostly on wholesale funding from banks, commercial papers (CPs) and non-convertible debentures (NCDs). They currently net around Rs 2 lakh crore from these two instruments. Banks, with around Rs 7 lakh crore in exposure to NBFCs, are in no mood to increase their exposure. There is also no moratorium offered by banks to NBFCs on these loans. This is adding to their problems. Also, the RBI's move to provide Rs 25,000 crore through the National Bank for Agriculture and Rural Development (NABARD) to small and medium MFIs will be of some help, but they will still need money as CPs and debenture holders won't offer them a rollover. In the last one year, especially after the IL&FS debacle, risk-averse MFs have already reduced their exposure in CPs and NCDs of NBFCs. A CRISIL analysis of NBFCs, rated by them, shows liquidity pressure will increase for nearly a quarter of them if collections do not pick by June 2020. "These NBFCs have Rs 1.75 lakh crore of debt obligation maturing by then," according to CRISIL.
NBFCs are demanding a direct low-cost borrowing window from the RBI for up to a year, but the regulator is yet to take a decision. In fact, they are also exploring the securitisation route to sell assets, especially MFI portfolio, and generate liquidity. Some banks, especially private ones, are keen on MFI loan portfolios since such loans are part of priority sector lending.
Capital: Conserve and Raise
Unlike the 2008 global financial crisis when the government and regulator came forward to bail out banks, this time the Centre is fighting this pandemic by using the already vulnerable banking system to help the industry, by postponing EMI collections. The RBI has asked banks to suspend dividend payments to shareholders to conserve banks' capital. But lenders will need a stronger capital position to face any eventuality. Kotak Bank is tapping the market with an equity issue. Many banks may not be that lucky since the market capitalisation of banks have fallen considerably in the last two months. One way would be to raise debt capital from institutions. Public sector banks, which control two-thirds of the banking system, may also need recapitalisation.
There are also other ways to conserve capital. "You have to lend to high-rated borrowers so that risk-weighted assets come down," says Chunduru of Indian Bank.
"Banks will also have to change their operating models like outsourcing, using shared services, not buying but renting out, etc.," suggests Rath of SBM Bank.