Small firms hit by note ban, banks brace for fresh wave of bad loans

The conservative estimate is that the fresh wave of bad loans could surface over the next three-four quarters and specifically be centred around loans to the MSME segment.

In fact, the Indian Banks’ Association (IBA) met twice in the second week of December. The meetings, while taking stock of the NPA situation, requisitioned a reassessment of cases where repayments have been delayed for more than 60 days. (Representational image)

Already reeling under high levels of non-performing assets (NPAs), the banking sector is bracing for the impact of a fresh round of NPAs in the wake of demonetisation of high denomination currency that has impacted overall demand in the economy and supply chain.

The conservative estimate is that the fresh wave of bad loans could surface over the next three-four quarters and specifically be centred around loans to the MSME (micro small and medium enterprises) segment.

A senior banker with a public sector bank said: “There are projections being made that the renewed stress on repayments, which had started improving in the months leading up to November, could last for another three-four quarters.”

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In fact, the Indian Banks’ Association (IBA) met twice in the second week of December. The meetings, while taking stock of the NPA situation, requisitioned a reassessment of cases where repayments have been delayed for more than 60 days.

The chief economist of a leading private sector bank, while pointing out there is no data to suggest that there has already been a rise in slippage, said: “Last two months saw an impact on the supply chain and overall demand in the economy. Even though they have improved now, there may be a spillover impact on the bank’s asset quality going forward.” He said it is mostly the smaller firms that have faced the brunt of the demonetisation move.

For banks, the impact on NPAs could be on the lines of the hit taken by MFIs (micro finance institutions). The recoveries by MFIs, which had improved until early November, saw a slide in December. In the two weeks following the November 8 demonetisation announcement, the collection rate for 11 MFIs had declined to 80 per cent. While there was a mild recovery subsequently, linked to the increased supply of new notes, the collections have seen a sharp slide again on account of the slowdown in business activities in the SME (small and medium enterprises) segment.

The CEO of a leading NBFC (non-banking financial company) said exposure to rural areas and small ticket loans in micro segments is under stress as they are dependent on cash collection. “The cash cycle got disrupted over the last two months and we think that it will take around four-five months to recover. So, it will lead to rise in NPAs in that segment. In fact, the rise in NPA will start reflecting beginning February as the RBI has given a 90-day additional time for recovery before they can be classified as substandard,” the CEO said.

The Reserve Bank of India too, in its financial stability report released in December 2016, warned against a sharp rise in NPAs of banks. It said that the banking stability indicator shows elevated risk for the banking sector due to continuous deterioration in asset quality, low profitability and liquidity.

“The stress test indicated that under the baseline scenario, the GNPA (gross non-performing assets) ratio may increase from 9.1 per cent in September 2016 to 9.8 per cent by March 2017 and further to 10.1 per cent by March 2018… If the macroeconomic conditions deteriorate, the GNPA ratio may increase further under such consequential stress scenarios,” the RBI said in its Financial Stability Report for December 2016.

Earlier, anticipating the loan repayment issues following demonetisation, RBI had relaxed prudential norms on asset reclassification in November and December 2016. On November 21, 2016, RBI issued instruction to banks to provide an additional 60 days beyond what is applicable, for recognition of a loan account as substandard for crop loans and term loans for business purposes including agriculture loans. Again, on December 28, the RBI instructed banks to provide another 30 days for recognition of loan account as substandard.