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Banks fear spike in bad loans fuelled by COVID third wave

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Written by Publishing Team

As cases rise, stricter restrictions on movement may be imposed, which will hurt industries’ ability to pay

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Rating agency ICRA sees a 15-20 basis point rise in restructuring requests from borrowers due to the latest wave of the pandemic. (representative image)

Like the rest of the world, the banking industry is watching the pandemic with caution. In the week ending January 9, India had 6,38,872 cases, which is a more than sixfold increase from the 1,02,330 cases recorded in the week ending January 2. As cases increase, and with them deaths, bankers worry that it could lead to a significant increase in bad loans.

The first and second waves of COVID, seen in 2020 and 2021, wreaked havoc on the economy. However, most economists say the third wave will likely affect the economy less for three main reasons: high vaccine coverage, the lack of likelihood of a severe and complete shutdown, and increased preparedness among industries and the public.

However, Indian banks, whose balance sheets have already been hit hard by the sharp rise in non-performing assets (NPAs), may have tough days again. As it stands, the credit takedown dropped to ₹43,484 crore in December from ₹1,18,951 crore in November 2021, according to media reports. Bankers do not anticipate a significant reduction in credit cutbacks in the future. But they fear that the ability of loan recipients to repay could be eroded if governments across the country impose tighter movement restrictions than currently in place.

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Rating agency ICRA said in a report, citing PTI, that the threat of a third wave of COVID poses a high risk to banks’ asset quality. It is seeing a 15-20 basis point rise in restructuring requests from borrowers due to the latest wave of the pandemic.

How COVID-19 Feeds NPAs

The epidemic and the disturbances it causes have led to the complete or partial closure of retail establishments, shopping malls, theaters, restaurants, etc. For example, the weekend curfew imposed in Tamil Nadu is expected to hit Pongal sales significantly. This means that the ability of merchants and businessmen to repay the installments of their loans is affected.

A longer period than the third wave may also lead to job cuts, as seen in 2020. If this happens, individuals may not be able to pay their EMIs.

The Financial Stability Report of the Reserve Bank of India (RBI) said the banks’ total NPA (GNPA) could rise to 8.1% in September 2022, from 6.9% in September 2021 according to the baseline scenario. He added that it could rise up to 9.5% in September under a severe stress scenario.

The Reserve Bank of India, since the onset of COVID, has gone for an accommodative monetary policy and kept repo rates unchanged. This may not be sustainable in the long term because it could lead to inflation, economists warn. Hence, if the RBI introduces an increase in the interest rates, the NPAs may rise.

However, most economists and industry stakeholders believe that the central bank is unlikely to do so until the third wave diminishes.

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