Lenders brace for defaults as new wave of covid sets in

MUMBAI : The third wave of the pandemic could degrade bank lending to microfinance institutions, small businesses and unsecured products such as credit cards and personal loans, although material stress will only manifest if restrictions on movement are imposed, experts said.

Bad debts in the banking system were starting to decline after the devastating second wave of the pandemic.

Gross non-performing assets (APM) fell to 6.9% as of September 30 from 7.48% in March. However, the Omicron variant of the coronavirus is now infecting faster than its predecessor last year, leaving experts worried about its impact on vulnerable sectors.

“Any serious wave will undoubtedly increase the risks for certain industries, but our position is that there is still an unrecognized risk in the unsecured space of retail and small and medium-sized enterprises (SMEs) due to regulatory forbearance. Microfinance institutions (MFIs) also fall into the high risk category, although the issues in this sector are a bit different given the clientele who are more vulnerable to disruption, ”said Saswata Guha, Senior Director (Banks) , Fitch Ratings.

According to Guha, it is possible that the third wave will increase the risk, which would only manifest itself if it were to cause blockages and disruption in business and economic activity.

“So far, while the number of infections is high, the hospitalization rate is low, which appears to be a key issue for authorities to watch out for this time around and will likely be taken into account before restrictions are imposed. movement are imposed. It could be a silver lining if the current trend in hospitalization remains moderate, ”he added.

Bankers also said collections had not been disrupted so far as local governments failed to impose strict travel restrictions. Blockages, which resulted in restrictions on the movement of goods and services last year and into 2020, were the root of the problems borrowers faced. These restrictions resulted in a loss of income for part of the population, which ended up defaulting on loans.

“Some areas will always be more in demand than others, but so far we are seeing better collections than in the second wave. It’s around 94-95% right now, and our teams in the field tell us borrowers are paying off quietly, ”said a senior private sector banker.

A public sector banker said they are already slowing down loan proposals from microfinance companies as they assess the impact of Wave 3 on the portfolio. “We had to suspend some loan proposals to microfinance institutions (MFIs) as a precaution,” he said.

Comparing the previous wave with the current wave, P. Satish, executive director of Sa-Dhan, an industry body for MFIs, said most staff and borrowers are vaccinated this time around, and the Omicron strain is rated as milder than previous variants in terms of health.

“In addition, big and strict lockdowns are not expected, so the impact on collections would be small,” he said, adding that banks have been cautious about lending to micro-financiers since the start of the year. demonetization, and this is not a new phenomenon. has only worsened since the start of the pandemic, but the government’s credit guarantee program has been a relief for the industry, Satish added.

Analysts have said that while banks will manage the impact of a partial foreclosure, a severe foreclosure could pose challenges to asset quality and growth.

“SMEs / MFIs remain the most vulnerable segments, and therefore banks with relatively higher exposure to these segments like Bandhan Bank, Ujjivan Small Finance Bank, IndusInd Bank, Axis Bank, RBL Bank, City Union Bank and DCB Bank could have relatively higher assets. quality risk, ”Emkay Global Financial Services said in a note to clients on December 30.

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