Refused Moratorium by Banks passed to Job cuts.

In the year 2021 one will get huge quality assets across sectors available at cheap price and banks are simply having an open invitation to come and buy these assets. Before we head collectively towards discovering this segment we need to get to the current positions of the Indian banking system during this Moratorium 1 and 2 phase and how they private banks and small private banks are placed. Banks failed miserably in the last 2 years. Big cats symphony money of the taxpayers and now the same one is being asked to face the heat of refusal of Moratorium.  MSME category is struggling on the road and the voice is unheard.

Most of the Indian banks are looking forward to raising of capital. Particularly the small banks where the liquidity factor is highly required. Retail loans have come down as job loss, pay cuts make them unaffordable for the class.  

The Moratorium 2 has been adopted less as compared to Moratorium 1 –the reason being that banks have become reluctant to provide any moratorium as the final decision lies in the hands of the banks. Hence those are thinking that the Indian corporates have been able to manage the downfall well the Skelton is yet to come out. Private Banks have straight forward refused to provide moratorium in many cases which lead to major impact on cost-cutting and particularly the human capital.  

This vicious cycle has now impacted the retail loan market which holds a significant part of the portfolio of the private banks. Banks have made provisions for the Covid -19 but those provisions will be used for write-off or rising NPA in the H2 of FY-21. There is nothing to be happy that banks have been able to have a lower ratio in terms of Moratorium 2. Private Banks had 30% as of April under Moratorium 1.0 to 10-20% under moratorium 2.0. They have refused to give and this is where the larger picture of NPA will come forward.  Asset base will increase due to the NPA issue and banks will have a stockpile of assets to be sold through ARC window. This is the place where a huge quantity of bad asset will line up for sale.  This will cover all sectors and predominately the retail will be the larger size with corporates often going for low valuation based exit models. 

Banks have built up COVID provisions of 50-200 bp of loans (2-8% of loans under moratorium) over the last couple of quarters.  This is being under consideration that H2 of FY-2020-21 will witness more hiccups when the moratorium ends. Further, the provisions are made to adhoc to cover those hiccups also which will arise where currently unpaid interest is just accumulating. The retail book size is a major concern area which is yet to be identified when the real picture of job loss will come forward.

Coming the borrowing calendar of the banks who are looking forward to raising capital -IDFC (Rs20 bn), Yes Bank (Rs150 bn), and IndusInd (Rs33 bn, Axis and ICICI are also looking to bolster their capital by 200 bp (7% and 12% dilution, respectively) in coming weeks.  This is just the beginning of the raising season. The PSU banks will require an injection of liquidity going ahead as the skeletons come off the economy.

To attract deposit small private banks have marginally reduced their FD rate of interest as compared to large banks.  Banks have played safely but the biggest risk is now passed to the retail through job and pay-cuts and further with retail assets like car, house etc getting into the warehouse of the banks. As per CMIE data, the unemployment rate has worsened to 8.21% as on 26th July vs. 7.94% as on 19th July.  While the urban unemployment rate has been consistently dipping, rural unemployment is witnessing a hike since 19 July.  So now you get a clear picture where the risk has been transferred.

Banks will come up with various instruments to get the pool of funds from the Mutual Fund industry as the dream of chasing alpha cannot be ignored.  Banking and PSU fund will be top of the chart followed with dynamic bond funds. Many corporates are also chasing the capital market for raising capital. When the lucrative offers will raise the capital the markets will find the outflow of the same.

Coming back to where we started ROE of the large banks is better placed as compared with small private banks. They are in the battle of increasing their share of the deposit. The allocation of provision due to NPA is more for the large corporates and less for the MSME. MSME cannot raise capital so easily and under the covid impact the last 3 years good records are shattered.  Those companies which failed to get Moratorium simply reduced the headcounts and salaries. 

The retail at the end is the most impacted.