Three-month moratorium on term loans may limit NPAs but hurt financials

Ending three-month moratorium on Reserve Bank of India (RBI) term loans most needed to resist foreclosure, bankers and industry observers said it would bring relief required for the quality of bank assets.

With most lenders worried that their customers’ ability to repay would be compromised due to foreclosure, Friday’s decision allayed the fear.

Nilufer Mullanfiroze, Executive Vice President (Personal Loans and Cards) of the Federal Bank, said: “For the right mix of customers and businesses, if the interest burden goes down for three months, it will have a positive impact on banks and customers. “

The flip side, however, is that while banks may continue to record payments due between March 1 and May 30, there will be no corresponding cash receipt entry in their books, if all clients opt for the moratorium.

In other words, this income will be treated as “accumulated but not received income”. To this extent, Abhinesh Vijayaraj of Spark Capital believes that this could jeopardize the book value or the net worth of banks by 0.5 to 2.0%, depending on the number of customers who opt for the moratorium. Therefore, although banks are not subject to asset quality pressures, their profit and loss accounts may be affected.

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Another aspect to see is short-term asset-liability management (ALM). You could say that the banks benefit from the reduction in repo and reverse repo by 75 basis points (bps) and 90 (bps), respectively, which makes it a solid argument for a new pricing of liabilities at a lower rate.

However, successful management of ALM in the current situation, where assets do not generate the desired level of income, would depend on the ability of banks to quickly revalue their liabilities at revised rates.

“Not all instruments automatically readjust to lower rates which could, in the meantime, put some pressure on bank profitability,” said a treasury official at a private bank. Furthermore, even if the reduction in the cash reserve ratio (CRR) and the marginal permanent facility (MSF) adds to the banks’ liquidity to buffer and protect the ALM, it is doubtful whether they can actually ‘use for this purpose.

Experts say RBI’s clear mandate that this surplus was only given to banks to spur lending growth removes the ability to park money in short-term instruments, which would otherwise have helped them manage ALM and generate cash flow gains.

This, in turn, would have strengthened their finances. With this option not available, analysts believe that a reduction of 10 to 40 basis points in the net interest margin (a measure of the bank’s profitability) seems likely.

Another blow, although not entirely related to the moratorium, could take the form of a decline in non-interest income. This measure draws its strength from volumes processed over a period of time, which are generally fixed fees payable by a client (such as loan processing fees).

In a scenario of low growth in net interest income (NII), non-NII income has largely helped banks. For example, private banks such as HDFC Bank, Axis Bank, ICICI Bank, IndusInd Bank and even some public banks such as Bank of Baroda and State Bank of India have experienced faster growth in non-NII revenues, compared to NII income, in the last three quarters.

As the loan disbursement thread weakens, bankers say they may have to forgo part of the commission income if the loan products are to remain attractive to clients.

They say that forgoing certain fee income is essential to stop a decline in loan growth, which most banks are already experiencing.

“From a growth of 30% and more non-NII, the growth rate of non-NII incomes can fall to 15-20%”, explains an analyst of a national brokerage.

This is why bankers believe that the exact financial impact of the loan moratorium could be felt most during the June quarter. While most bank stocks have taken the RBI’s decision positively, analysts believe the financial impact of the moratorium will most likely affect their stocks when they reopen on Monday.

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