Indian banks are already struggling with 9.35 trillion rupees ($ 123 billion) with secured loans, which is equivalent to approx. 9.1% of their total assets at the end of September 2019.
“There is a government consideration that banks that do not carry assets (NPA) could double to 18-20% by the end of the fiscal year, as 20-25% of the outstanding loans face a risk of default, “said the official with direct knowledge of the case.
A fresh wave in bad debt could hit credit growth and delay India’s recovery following the coronavirus pandemic.
“These are unprecedented times and the way things are going, we can expect banks to report twice as many NPAs as we have seen in previous quarters,” the chief financial officer of a top public bank told Reuters.
The official and bankers refused to be named as they did not officially have permission to discuss the matter with the media.
India’s finance ministry declined to comment while Reserve Bank of India and the Indian Banks’ Association, the main industry body, did not immediately respond to emails seeking comment.
The Indian economy has been stalled in the middle of a 40-day nationwide shutdown to curb the spread of coronavirus cases.
The shutdown has now been extended by another two weeks, but the government has begun to ease some restrictions in districts relatively unscathed by the virus.
India has so far recorded almost 40,000 cases of coronavirus and more than 1,300 deaths due to COVID-19, the coronavirus respiratory disease.
“RIDING THE TIGER”
Bankers fear that the economy will open fully by June or July, and loans, especially loans to small and medium-sized businesses, which make up nearly 20% of total credit, may be among the hardest hit.
This is because all 10 of India’s largest cities fall into high risk red zones where restrictions will remain strict.
A report of Axis Bank said that these red zones, which contribute significantly to the Indian economy, account for approx. 83% of the total loans granted by the banks in December.
One of the sources, a CEO of a public sector bank, said economic growth was weak and risk had been increased, even before the coronavirus crisis.
“Now we have this Black Swan event, which means, without any meaningful government stimulus, that the economy will be in tune for several quarters,” he said.
McKinsey & Co last month predicted India’s economy could contract by approx. 20% in the three months to June, if the closure was extended to mid-May and growth in the fiscal year is likely to fall from 2% to 3%.
Bankers say the only way to stem the steep rise in bad loans is if the RBI significantly eases bad asset recognition rules.
The banks have asked the central bank to allow all loans to be categorized as NPAs after 180 days, which is double the current 90-day window.
“The lock is like driving the tiger, once we get out of it, we will be in a difficult position,” a senior banking sector told Reuters.
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