One of the hardest hit sectors during this period is the Financial sector. As revenue fell, there could be a massive rise in Non-Performing Assets. India has enough issues handling unpaid loans from India’s corporates, but now that may increase as small borrowers start defaulting as well. This is accentuated as the stress induced by Covid-19 has greatly impacted the demand for credit as well.
Four of the biggest banks in India namely the State Bank of India, Bank of Baroda, IndusInd Bank and ICICI Bank had its earnings estimates reduced by the Bank of America. SBI has the biggest slash in rating which indicates that stocks could underperform. The founder of Paytm, Vijay Shekhar Sharma describes this as the ‘biggest nightmare’ of 2020.
Even banks like IndusInd where 90 per cent of its customers decided not to opt for the 3-month moratorium by the RBI, still got downgraded to neutral, same as ICICI bank. The only bank to avoid a cut is HDFC bank, which maintains a buy rating by BOA. Even UBS and CLSA (reduced target price to 70 % on banks) slashed their estimates as shares dipped over 30 per cent in April.
Most fintech lending companies that have Non-Banking Financial Companies (NBFC) licenses may take a huge hit, also they don’t fall under the 3-month moratorium on repayments introduced by the RBI.
Even though there is a moratorium offer in place, the fact that people don’t have enough money to pay is cause of concern. RBI also reduced the reverse repo rate for NBFCs. There is a chance that there will be a pass credit rating discount in the country.
There was a large uptick in NBFC start-ups in 2019 getting over $593 million in capital. But now, both the companies and investors are seeing at a possible rise in bad loans. A moratorium on credit rating should be introduced as well.
As fear grips the minds of investors, and not to mention the revenue reduction being faced by the economy, it’s not just banks bearing the brunt, even fintech start-ups are facing the heat.
