Fears about India's retail loan defaults overblown, says Macquarie

The volume of Indian loans subject to moratorium is dropping, suggesting that fears about large-scale defaults on banks’ retail lending books may be overblown, according to analysts at Macquarie Group Ltd.

Based on soundings with home lending specialist Housing Development Finance Corp. and Indian banks, “the unanimous feedback has been that there has been a decline in the total loan book under moratorium from the 25–30% numbers reported as of end-May,” analysts led by Suresh Ganapathy wrote in a note.

It’s too early to calculate the new figure, but at HDFC the proportion of the retail loan book subject to deferral fell to 7% as of June 15 from 21% in May, the note said.

“Hence, we believe worries about large-scale retail defaults are exaggerated,” the Macquarie analysts wrote.

The Reserve Bank of India has allowed borrowers to delay monthly payments on their loans until the end of August, to provide some relief from a prolonged lockdown that has shuttered businesses and left millions jobless.

A key reason for the decline in loans subject to moratorium was the greater clarity on the additional liability borrowers will face, Macquarie said. Also, some banks have switched from an “opt-out” to an “opt-in” policy with the loans, it added.

Under the new arrangement, borrowers have to request the payment deferral, rather than being automatically included unless they opt out.

Another factor is the lower rate of job losses among white-collar staff than had been feared, which showed through in the salary payments into their bank accounts.

“Two major banks who have a large number of salary accounts indicated that the salary uploads into the accounts dipped slightly in April but were stable in May, and they have not seen any major decline,” Macquarie said.

However, banks remained cautious about reading too much into the lower moratorium rates, the analysts said. Customers are still able to opt for the deferrals until the end of August.
 

And despite the drop seen with retail lending, the moratorium ratio on HDFC’s corporate book stayed largely flat at around 40%, Macquarie said.