Banks Navigate Uncharted Territory Amid COVID-19 Fallout

Strategic Insights -

Amid the COVID-19 pandemic's economic shockwaves, Indian banks are on a treacherous journey, wrestling with the consequences of massive loan restructuring and potential default. Billionaire Uday Kotak, founder of Kotak Mahindra Bank, cautions that banks may not reveal the truth about their loan portfolios for a long time, despite the Reserve Bank of India's (RBI) efforts to regulate the restructuring process.

Key Takeaways:

  • The RBI's loan restructuring plan, implemented to ease payment schedules for those affected by the lockdown, may lead to a significant increase in bad loans, potentially up to 14.7% of overall loans.
  • Private banks, such as HDFC Bank and Kotak Mahindra Bank, are raising capital at a faster pace than state-run banks, signaling a potential shift in strategy to deal with potential defaults.
  • Historically, 70-75% of corporate restructured loans and 40-60% of non-corporate restructured loans have become dud loans, highlighting the risks associated with loan restructuring.
  • Investors are valuing transparency and capital provisioning over the apparent gains of loan restructuring, leading to a valuation disparity between private and PSU banks.

Statistics:

  • Up to Rs. 2 lakh crores of loans may be at risk due to the economic damage caused by the pandemic (Crisil's study)
  • Total bad loans could climb to 14.7% this fiscal, from 8.5% of loans last year (Financial Stability Report)
  • Private lenders' bad loans may rise to 8.7%, while government-owned banks' bad loans could soar to 16.3% (Financial Stability Report)
  • HDFC Bank's effective moratorium is about 9 percent of book, with a provision of Rs. 4,000 crores for Covid-related stress
  • State Bank of India more than double its size with a moratorium of 11 percent of books, has set aside Rs. 3,000 crores

Sources:

  • Crisil's study: "[estimate] about Rs. 2 lakh crores of loans may be at risk"
  • Financial Stability Report: "overall bad loans could climb to 14.7% this fiscal, from 8.5% of loans last year; [Private lenders' bad loans may rise] to 8.7%, [for] government-owned banks, it could soar to 16.3%"
  • RBI's loan restructuring plan
  • Interview with Uday Kotak, founder of Kotak Mahindra Bank: "one of the dangers to the financial sector... you may not know the truth for a long time"