RBI industrial outlook surveys confirm what bank NPA charts have been telling us for long

Two latest surveys on industrial outlook conducted by the Reserve Bank of India (RBI) give us a sense of what COVID-19 could do to the Indian economy.

The RBI released the results of the 89th round of the Industrial Outlook Survey (IOS) conducted during January-March, 2020 and the result of another quick survey with a smaller sample in the wake of the virus outbreak.

After the virus outbreak gained momentum, industries have assessed that they are walking into a highly pessimistic phase in terms of demand and overall financial situation. This wasn’t what they said in the first survey.

In the first survey, conducted in Jan-March, about 860 companies participated.

Outcome? In Q4, all the respondents polled, expected positive sentiments on external demand and their assessment of the overall financial situation was improved.

Manufacturing companies assessed some improvement in production and order books from the weak sentiments exhibited in the previous quarter; the sentiments on employment conditions became mildly optimistic. They also said pressures stemming from interest payments on borrowings and salary expenses were bound to soften.

COVID-19 impact

Then came the second survey. This was after the surveyors realised things are going haywire as COVID-19 began showing its real impact. This survey was conducted during March 18-20, 2020 among 860 respondents again, of which, only 48 companies responded.

What was the outcome? Respondents assessed said demand conditions will deteriorate for the manufacturing sector, which also translated into pessimism on the overall business situation for Q4 of fiscal year 2020. Even the outlook for Q1 of FY21 also indicated negative sentiment.

Basically, the responses between the regular industrial outlook survey and the quick survey reflected sharply different views. The latter confirming sudden deterioration in sentiments across all sectors for Q4 and a stark pessimism for Q1 when compared to their assessment given in the regular round of the survey.

So one can say that the COVID-19 outbreak has caused panic among industries as the RBI surveys show. Even then these predictions may be premature. The final impact of the virus outbreak both in India and abroad remains uncertain even at this point.

For example, take a look at the GDP forecasts for India. On Friday, Fitch Ratings said it has slashed India's growth forecast to a 30-year low of 2 percent, from 5.1 percent projected earlier for the fiscal year ending March 2021.

On the other hand, the Asian Development Bank (ADB) projects India’s growth to slow down to 4 percent in FY21. That’s quite a difference between the two GDP estimates. Surveys can be sometimes misleading since the small sample chosen may not be reflective of the actual trend.

But the pessimistic scenario painted by the RBI quick surveys is shared by one other key primary data indicator — bad loans in the banking sector.

Most banks are indicating a sharp deterioration in the asset quality scenario. For instance, in an interview given to Moneycontrol this week , Punjab National Bank’s Managing Director and CEO, SS Mallikarjuna Rao had said the bank  estimates about Rs 5,000 crore fresh slippages in the fourth quarter.

This included Rs 1,800 crore slippages that the bank identifies as a direct fall out of COVID-19 impact. PNB isn’t alone. On Friday, global rating agency, Moody’s placed IndusInd Bank's domestic and foreign currency issuer ratings of Baa3/P-3 under review for a downgrade.

This reflects likely deterioration in asset quality in a worsening economy, the agency said.  Most banks which reported the third quarter numbers have shown a notable increase in the level of bad loans.

Of them, the most worrying numbers came from Yes Bank. Out of its total Rs 40,000 crore bad loans, Rs 39,000 crore were corporate NPAs. And possibly, there is more to come.

Falling consumer confidence

Along with the worsening business scenario, one should see the trend in consumer sentiments as well. According to the latest RBI Consumer Confidence survey, consumer confidence, as measured by the current situation index (CSI), in early March 2020 remained broadly close to the all-time low, which was recorded in the previous survey.

Sentiments on the general economic situation, employment scenario, and household income remained pessimistic.

Economists and banking analysts this writer spoke to are of the opinion that the bad assets in the banking sector could be spike significantly on account of the prolonged lockdown which could particularly hurt small and medium-sized enterprises (SMEs) and microfinance loans.