Asset quality a worry for lenders despite shrinking moratorium book: Icra

Loan restructuring could postpone recognition of stress in the lender book in the near-term, but high share of such assets would be a credit negative, Icra said

Although the moratorium book of lenders has shrunk in Phase-2 (June-August), yet the pressure on asset quality remains very high as borrowers who have continued with moratorium are more vulnerable to default. Rating agency Icra says, while there is debate on whether the moratorium period should be extended beyond August or a one-time restructuring should be granted, both the sops could pose challenges to lenders not only in implementation but also on their financial stability.

According to the rating agency, median loans under moratorium would be around 25-30 per cent compared to a broad band of 10-50 per cent of total loan books with many of the borrowers being common under Phases 1 and 2. In general, the moratorium levels across banks are lower than those of NBFCs with private banks having even relatively lower levels. 

Earlier, the rating agency had estimated that 10-15 per cent of borrowers under moratorium out of 30-40 per cent of the overall loan book under moratorium would default, with the expected slippages at 3-6 per cent of advances in the current fiscal. However, with reduction in loan book under moratoriums a higher percentage of this moratorium book now becomes vulnerable.

This will certainly put some pressure on the capital position of lenders. As banks have core equity capital of 10-15 per cent and the same for the shadow banking sector is at 12-15 per cent, a 5 per cent incremental asset quality stress due to covid would pose risk to the capital of some of the lenders in the current fiscal.

Although the credit growth in this fiscal is estimated to be low, but with rising bad loans, and muted profitability, the additional capital requirement can be as high as Rs 45,000 - 82,500 crore for public sector banks during FY21 and Rs 25,000 – 48,300 crore for private banks during FY21-22. Similarly, the NBFCs may require capital to the tune of Rs 25,000-35,000 crore to absorb asset quality shocks and provide comfort to their lenders.

In the month of July, the collection efficiency of lenders has improved a lot, with the gradual opening up of the economy, however, it has still not reached the pre-covid levels (90-95 per cent collection). Although the gradual relaxations in restrictions imposed during the lockdown have helped in improving the collection efficiencies and thereby reduction in residual assets under moratorium, the pace of recovery seems lower than expected because of localised re-imposition of lockdowns by various states over the last two months, ICRA said.

With moratorium on repayments ending in August, some have asked for an extension in moratorium while others have pitched for a one-time restructuring of loans. Unlike the previous non-performing asset problem, where the corporate book of banks was under immense pressure, this time the stress seems to be emerging from the micro small and medium enterprises (MSMEs), agriculture and retail (especially self-employed) segments.

While loan restructuring could postpone the recognition of stress in the lender book in the near-term, high share of such assets would be a credit negative, Icra said.

It further said, if a one-time restructuring window is made available, more borrowers may opt for it to ease out the near-term uncertainties, conserve liquidity and, to smoothen their cash flow as economy takes the turn for revival. If the RBI were to consider one-time restructuring, it is expected to be extended to certain sectors which would take longer to recover.

Highlights: 

• Public Sector Banks require capital of Rs 45,000-82,500 crore in FY21
• Private Sector Banks require capital of Rs 25,000-48,300 crore during FY21-22
• NBFCs require Rs 25,000-35,000 crore capital during the current fiscal