The S&P BSE Bankex index slid 6.7 per cent on Monday. The reason, experts say, is that not only have the announcements of the stimulus package by the finance minister failed to address economic growth concerns, but also the fear that bad loan pressure may rise for the banking sector.
Concerns over the recovery of loans to MSMEs (micro, medium and small enterprises), the suspension of Indian Bankruptcy Code (IBC) proceedings, and a few steps to boost overall credit offtake, among others, are key reasons why banking stocks saw heavy selling on Monday.
Since the start of the stimulus announcements on May 13, the banking index has shed 10 per cent; it is down over 18 per cent (versus a 11 per cent fall in Sensex) in this month so far.
The draft guidelines on the Rs 3-trillion collateral-free funding to MSMEs reveal that instead of direct guarantee, these loans will have government guarantee through the Credit Guarantee Fund Trust for Micro and Small Enterprises or CGTMSE. This has mounted worries as MSMEs (38-50 per cent of banks’ loan book) are already a concern for lenders in terms of asset quality.
“No direct sovereign guarantee for MSME loans, which would be free of collateral, has raised concerns on recovery as the guarantee would come from a trust,” said Deepak Jasani, head of retail research at HDFC Securities. In fact, this guarantee comes with caveats, and hence, has disappointed banks, especially public-sector banks, as the overall economic revival is likely to take time and this can impact loan recovery from MSMEs going ahead, Jasani added. The market is awaiting final guidelines on this issue.
Senior bankers of state-owned banks said the government's direct support is much less, but it has signalled public sector banks to be liberal with borrowers, especially MSMEs, during the current adverse times. Borrowers, who have delinquent behaviour, will get the benefit of doubt and the legal process will get affected, they cautioned.
Also, the guarantee is only for extra funding of upto 20 per cent of existing loans, and the existing
exposure is not part of the deal, says a banking expert. Thus, only upto 17 per cent of the total exposure will be protected by the government guarantee.
There is also fear that action may be taken in future against officials if loans turned bad. An executive of a top bank said: “Past experience shows the intent and context in which the decision to give a loan was taken are often forgotten, and only the 'decision' and 'loan becoming bad' are kept in focus for vigilance and legal proceedings.” These concerns remain even as the government had amended rules much before the Covid-19 outbreak to address the "fear" element in the mind of bankers.
The government suspending IBC proceeding for fresh cases for one year amid Covid-19 has also added to investor concerns as it could hurt the loan recovery rate and spoil credit discipline among corporate borrowers.
Analysts at Emkay Research stated: “We believe that this will be a setback for banks looking for resolution/liquidation under the legal umbrella, with no risk of witch-hunting later on and more so when another wave of corporate NPAs (non-performing assets) could be on way.”
Since its inception, the IBC has assisted banks to recover Rs 1.84 trillion (44 per cent of loans due) and instilled fear in the minds of belligerent corporates, according to Emkay Research. Sunil Jain, head of research at Nirmal Bang, echoes similar views. “The suspension of IBC proceeding has kept the recovery of chunky amount on hold, which would further delay asset quality cycle of banks.”
A likely extension in credit demand revival and sustained asset quality worries for the retail segment given the higher share of moratorium (25-70 per cent) are other concerns.
With little direct funding from the government, economic revival, mainly the private consumption, will take time and this, in turn, will delay recovery in credit demand, said Jain.
Lack of measures to help revive worst-hit sectors like aviation and hotels has also raised fears regarding more loans turning bad.
Among few positives is that banks have been increasing provisions for bad loans after asset quality review kicked in 2015-16. The average provision coverage ratio (PCR) of scheduled commercial banks stood at 71.6 per cent at the end of December 2019, against 65 per cent a year-ago, according to CARE.
Lastly, it also needs to be seen whether the stimulus package will help avoid down-rating of borrowers to below investment-grade.
Investors, thus, should wait until these clouds clear and stick to quality names, said experts.