PremiumThe pandemic’s 3rd wave may sour bank loans to microfinance institutions, small businesses and unsecured products such as credit cards and personal loans, although material stress will manifest only if restrictions on movement are imposed, experts said
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MUMBAI : The pandemic’s third wave may sour bank loans to microfinance institutions, small businesses and unsecured products such as credit cards and personal loans, although material stress will manifest only if restrictions on movement are imposed, experts said.
Bad loans in the banking system were beginning to come down after the devastating second wave of the pandemic.
Gross non-performing assets (NPAs) were down to 6.9% as of 30 September from 7.48% in March. However, the coronavirus’s Omicron variant is now infecting faster than its predecessor last year, leaving experts worried about its impact on vulnerable sectors.
“Any severe wave will undoubtedly raise the risks for some sectors, but our position is that there is still unrecognized risk sitting within the unsecured retail and small and medium enterprise (SME) space due to regulatory forbearance. Micro-finance institutions (MFIs), too, are in the high-risk category although the problems for that sector are a bit different given the customer base which is more vulnerable to disruptions," said Saswata Guha, senior director (banks), Fitch Ratings.
According to Guha, there is a possibility that the third wave may enhance the risk, which would only manifest if it were to result in lockdowns and disruptions in business and economic activity.
“So far, while infection numbers are high, the hospitalization rate is low, which seems to be a key monitorable among authorities this time around and will likely be taken into account before restrictions on movement are imposed. This could be a silver lining if the current trend around hospitalization remains muted," he added.
Bankers also said that collections have not been disrupted so far, as local governments have not imposed stringent restrictions on movement. Lockdowns, which led to curbs on the movement of goods and services last year and in 2020, were the root of the problems faced by borrowers. These curbs led to a loss of income for a section of the population, which eventually defaulted on loan repayments.
“Some sectors will always be more stressed than others, but so far, we are seeing better collections than during the second wave. It is around 94-95% as of now, and our people on the ground tell us that borrowers are repaying without much ado," said a senior private sector banker.
A public sector banker said they are already going slow on loan proposals from microfinance companies as they assess the impact of the third wave on the portfolio. “We have had to put some proposals for lending to microfinance institutions (MFIs) on hold as a precaution," he said.
Comparing the previous wave with the current one, P. Satish, executive director of Sa-Dhan, an industry body for MFIs, said that most of the staff and borrowers are vaccinated this time around, and the Omicron strain is assessed to be milder than previous variants in health terms.
“In addition, wholesale and stringent lockdowns are not expected, so the impact on collections would be low," he said, adding banks have been being cautious about lending to micro-financiers since demonetization, and this is not a new phenomenon. It has only accentuated since the onset of the pandemic, but the government’s credit guarantee scheme came in as relief for the sector, added Satish.
Analysts said that while banks will manage the impact of partial lockdown, a severe one could pose challenges to asset quality and growth.
“SME/MFI remain the most vulnerable segments, and thus 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 be at relatively higher asset quality risk," Emkay Global Financial Services said in a 30 December note to clients.
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