“While it is too early to comment on the extent of the impact on the asset quality of retail loans due to the rising Covid cases, there is reason to be cautious. After the nationwide lockdown last year, we had witnessed a severe drop in collections for most asset classes though the availability of a moratorium provided a breather from an NPA-recognition perspective,” said Abhishek Dafria, VP and head (structured finance) at Icra.
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Dafria added that while the current restrictions are localised and less harsh, the severity has been gradually increasing as the surge in Covid cases is yet to be brought under control. Pointing out that last year it was microfinance and unsecured SME loans that had the highest delinquencies after the lockdown period, he said that the risk categorisation would remain similar for areas that see stronger government restrictions.
According to lenders, they would be helpless if the loans slip into non-performing asset (NPA) category as then no further relief can be given and they would have to initiate recovery proceedings. Last year, in addition to the moratorium and emergency credit line, a SC order had prevented banks from classifying delinquencies after the Covid outbreak as NPAs.
Since default by small businesses could result in credit freeze to this segment, the RBI might be forced to look at a moratorium if the lockdown restrictions get extended geographically and extend for a longer period.The Finance Industry Development Council, which represents NBFCs, has written to the RBI seeking an extension of the one-time restructuring of MSME advances till March 2022, as the companies are yet to revive their businesses due to the surge in Covid cases.
“Due to the severe second wave of COVID-19, the MSMEs as also the retail and wholesale trader industry have not been able to revive their economic activities and therefore are in urgent need of support from the lenders. Various surveys and reports are forewarning that the operating environment for banks will most likely remain challenging, as the second wave could dent the sluggish recovery in consumer and corporate confidence, and further, suppress banks’ prospects for new business,” the council said in its letter to the RBI governor.
According to bankers, the combination of moratorium and emergency credit line guarantee scheme in the previous year helped to protect banks, NBFCs and small businesses. “Last year, the additional line of credit enabled some of the small business to clear expensive loans to NBFCs and the moratorium provided relief until business started. This time around, many small businesses will not have the capacity to remain afloat if the lockdown is extended,” said a senior banker.