The pandemic has left a deep-rooted impact on economies across the globe, with the extended period of lockdowns and new norms of social distancing in practice pushing the growth trajectory downwards. The Indian economy is not immune to the pandemic condition, and thus all the banks, NBFCs, and debt capital markets are under scrutiny.
Crux of financial ecosystem – Banking and NBFCs
RBI introduced the Asset Quality Review (AQR) of banks in 2015, and since then the banking NPA disclosures have progressed. The gross banking NPAs rose from 4.5% in March 2015 to 11.6% of advances in March 2018, later declined to 9.3% of advances in September 2019.
On account of the ongoing pandemic, RBI has enabled banks to postpone NPA recognition, of around Rs 8 trillion of MSME, MUDRA, and commercial real estate loans. It is said that there could be significant stresses creeping, and the true banking NPAs could already be over 11% of advances. A quick glimpse shows that the scope of any particular bank’s loan loss provision has largely been determined by the capital available to absorb them, rather than by any objective assessment of the recoverable value from the NPAs. There is more trust deficit around NBFC NPAs. Also, while the RBI has strengthened reviews of NBFCs, unlike banks, they have not been subjected to a meticulous formal AQR. To be precise, NBFC gross NPAs constituted 6.3% of advances as of September 2019, lower than that of banks. This is not credible and a trust deficit is every financial system’s bummer. As it leads to speculation and fear to take over.
The Indian economy hopes for a prompt revival, even the FY21 GDP could contract by 5% to 6%. There is considerable financial crunch with both households and businesses, which will exhibit higher financial sector NPAs. RBI has announced a temporary moratorium, which provides relief to financial players.
Way forward
Banks and NBFCs should have a sector-wise approximation of how NPAs could develop in the post-pandemic scenario. This could be a valuable means for policymakers to help define the scope and include a sectoral focus while dispensing COVID-19 relief and recovery package. There cannot be any more delay in addressing the issues concerning stressed sectors such as real estate, power, MSME, telecom, airline, shipping, and others. Whatever steps taken are likely to confuse promoters, consumers, and financiers, but for the sake of the financial sector and the economy, one cannot simply ignore vital components.
