After a washed-out Q1, bankers hope to cash in on revival starting July

Demand expected to rise, but more gradually than last year

After a washed-out first quarter, bankers are pinning their hopes on a revival from July, now that the second wave of the pandemic is ebbing and the economy could soon show signs of recovery. The rise in the economic activity index in June points to the beginning of a turnaround.
 
State Bank of India Chairman Dinesh Khara says economic activity has started reviving after the first week of June 2021. His bank expects credit to grow by nine per cent in FY22, up from 4.8 per cent in FY21. The economic activity index, which the bank compiles, has shown significant improvement, at about 72 now from around 61 a month ago.
 
Senior bankers and economists say that the pace of vaccination is a critical consideration in this, since vaccines would blunt a third wave if and when it comes. “We should expect better second quarter demand as consumer spending returns to the market. Vaccination progress is key to building optimism in the economy,” says Rajkiran Rai G, managing director and chief executive, Union Bank of India, and chairman of the Indian Banks’ Association (IBA). 
 
Demand revival
 
Experts say that rural India will do better than urban areas, where the salaries may take some time to return to pre-pandemic levels. However, when people have been economically and psychologically affected by the illness and death of family members, demand may remain suppressed for some more time.
 
“We expect demand to recover, but not like last year when the lifting of nationwide curbs was followed by vigorous buying from households. This time, it will be more gradual,” says Rai.
 
“Huge healthcare expenses and depleted savings will keep consumer confidence and demand weak,” adds Arun Singh, global chief economist at Dun & Bradstreet, a financial services and data management firm. “Until a substantial section of the population is vaccinated, cautiousness will prevail amongst businesses to ramp up their capex or hiring plans.”
 
Others, too, are cautiously optimistic. “There will be some improvement from the second and third quarter onward. If all goes well, we can do business like last year or even better than that,” says Y Viswanatha Gowd, managing director and chief executive, LIC Housing Finance. 
 
In April 2020, the government’s stringency index was 99. This April, it fell to 71, but increased to 79 in May. 

 
“This indicates that economic activities did not halt during the second wave. As cases abate, restrictions are likely to be relaxed further across states. We expect most economic activities from July,” says Singh. “The prospects for growth from the second quarter are better compared to the period April to June of 2021, and also compared to last year.”
 
According to Suresh Khatanhar, deputy managing director, IDBI Bank, the revival will be gradual in the second quarter, moving towards a situation similar to Q2 of FY 2019-20 (pre-pandemic year). “Things are expected to be much better from September, helped by a good monsoon and preparation for the festive season,” Khatanhar says.
 
Gowd adds that LIC Housing Finance has stepped up hiring, anticipating revival of demand. “There is construction activity in tier-II and tier-III cities. The low rates of interest will add up to good business.”
 
Analysts see an uptick in the demand for credit, particularly in the retail and micro, small and medium enterprises (MSME) segments.
 
“Banking sector credit growth should rise by 400-500 bps to 9-10 per cent in the current fiscal, with GDP growth expected to clock 9.5 per cent,” says Krishnan Sitaraman, senior director–financial sector ratings at CRISIL. “The credit uptick will be driven by the retail segment with mid-teens growth followed by the agriculture and MSME segments, with the expectation of normal monsoon and continuation of the Emergency Credit Line Guarantee Scheme (ECLGS) scheme.”
 
However, corporate credit growth will continue to be subdued as capex revival is still some time away and many corporate entities are deleveraging, Sitaraman adds.
 
Rai agrees: “Firms are anticipating demand revival, but not enough to build inventory just yet. Likewise, retailers are more guarded in placing bulk orders to suppliers.” 
 
Festive demand and credit growth
 
Lenders are hoping that the festive season, just two months away, will spur credit growth. If the second quarter turns out to be better overall, there could be some big-ticket purchases on home, car and white goods, helped by low interest rates.
 
“Lenders will be more liberal with waiver of fees and other enablements this festive season,” Rai says. 
 
The issue of NPA
 
In March 2021, non-performing assets (NPAs) were about 10 per cent of advances. But bankers are cautious about predicting the status of bad debts in the coming days. NPAs would have piled up in the banking system last year if there had been no restructuring schemes annou­nced by the government and the RBI, which also offered a moratorium on payments for six months. The Supreme Court ordered a standstill on NPA recognition till March this year. 
 
However, there could be a rise in NPA numbers this year as the same kind of blanket restructuring is not available this time. Also, given that demand has collapsed, the restructured companies could fall into stress. The stress on small businesses could also increase NPAs.
 
CRISIL estimates that collection efficiencies dropped by 5-10 per cent in April this year compared to March; and May saw a further 10-15 per cent decline as the lockdowns continued. 
 
However, “initial estimates are that June collections are better than May’s as the lockdowns are slowly easing in various parts of the country. If this trend continues, we should see collections in Q2 nearing the levels seen in Q4 of last fiscal,” says Sitaraman.
 
LIC Housing Finance’s Gowd says that despite the lockdowns, the company’s collections were around 90 per cent. “When the situation improves after the first quarter, we will look for good recovery in all areas of operations — like last year.”