The Reserve Bank of India’s (RBI’s) move to announce fresh round of restructuring of loans for individual and small borrowers for up to two years is a start of a possible long-drawn battle, say analysts who hailed the timely action by the central bank but fell short of giving a verdict on the impact on the sector.
The possible impact on the banking sector of the announcements is difficult to be assessed at the moment as the Covid-19 situation remains precarious, they say.
“The RBI has done something to begin with which addresses the concerns of, both, the lenders and the borrowers because of the uncertainty due to the rising cases and subsequent lockdowns,” says Gaurang Shah, senior VP at Geojit Financial Services.
He adds: To pre-empt the situation and comment on the impact is extremely difficult right now because we don’t know how long the local lockdowns will stay or whether the vaccination drive will pick up sooner than expected to improve the economic situation.
RBI governor Shaktikanta Das, in an unannounced press conference Wednesday morning, doled out “first of the many” measures to support the economy during an unwavering second wave of Covid-19 infections.
The RBI, for instance, will have a special long-term repo operation window for small finance banks, whereby the banks can borrow funds up to Rs 10,000 crore at repo rate for deploying for fresh loans SFBs, to be deployed for fresh lending of up to Rs 10 lakh per borrower. Also, lending by SFBs to MSMEs will be classified as priority sector lending (PSL).
The measures, AK Prabhakar, head of research at IDBI Capital says, were the need of the hour as the Covid-19 situation becomes murkier day after day.
"The small and micro enterprises and the MFIs needed support and the RBI has thrown a liquidity lifeline at them at the right time," he says with a rider that the turnaround for the sector will take time.
That said, the measures will ensure that the liquidity for them will not stop as being PSL will incentivize banks to lend to them at lower rates; effectively cutting their cost of lending too, he explains.
At the bourses, investors cheered the announcements and sent shares of small finance lenders soaring. Among the individual stocks, Ujjivan SFB gained 6 per cent to Rs 30.40, while AU SFB was up 5 per cent to Rs 58.80, followed by Equitas SFB (up 4 per cent at Rs 58.80) and Suryoday SFB (1 per cent at Rs 248.80) on the BSE in the intra-day trade.
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At the end of March quarter of FY21, small business loans (SBL)-MSME loans accounted for 39 per cent (Rs 13,891 crore) of AU Small Finance Bank’s total loan book; and 44 per cent (SBL), 7 per cent (MSE), and 18 per cent (micro finance) of Equitas SFB’s total loan book. As regards Ujjivan SFB, MFIs and MSE loans accounted for 73.2 per cent and 8.4 per cent of the lender’s total loans at the end of Q3FY21.
The RBI also announced that individual borrowers and small businesses, with loan outstanding of up to Rs 25 crore and who did not avail for moratorium or restructuring relief last year, for instance, can ask for restructuring of their loans for up to 2 years.
Meanwhile, individual borrowers and small businesses that availed the facility last year but banks allowed restructuring of less than two years can now avail the facility and tell banks to increase the residual repayment window to up to two years in total.
The move, Siddharth Purohit, equity analyst at SMC Global says, will be positive for SME businesses as they were already facing issues. Moreover, he doesn’t expect many cases of restructuring to come forward if the current trends of restructuring requests is anything to go by. "Overall, the announcements are good for the banks as they can avoid NPAs again," he adds.
AU Small Finance Bank’s restructuring book stood at 1.8 per cent of total loan book (of which wheels and SBL accounted for 90 per cent), while Equitas said its collection efficiency has improved to 91.1 per cent of pre-Covid level as of Q4FY21. The lender didn't disclose quantum of restructuring requests.
Overall, the announcements seem to be sentimentally positive even as analysts believe they may take time to show meaningful impact on the ground.
Naveen Kulkarni, chief investment officer at Axis Securities sees Ujjivan SFB and Equitas SFB along with MSME lenders such as DCB Bank and City Union Bank benefitting from the measures.
That said, Nitin Bhasin, head of research - Institutional Equities at Ambit opines that the central bank's announcements should be read in the context of their pro-activeness to allay any potential concerns around either MSME or MFI credit quality stress, as the second wave of Covid has hit these segments. But, he doesn't find these to be such a big boost like last year’s announcements.
"To be fair, the RBI has already done the heavy-lifting last year by slashing rates to record lows and infusing a copious amount of liquidity in the system. The problem today is of demand, as reflected in the very poor credit offtake, especially from the corporate sector, and these announcements will not have a very significant impact on the same, and hence the economy," he cautions.