Budget 2020

Whatever banks are reporting does not present the full picture: Saswata Guha, Fitch Ratings

We are pretty mindful of the fact that a fair degree of underwriting has been done by banks over the last three to four years in certain cases quite aggressively and some of that underwriting is probably yet to see the right kind of seasoning yet, says Saswata Guha, Director & Team Head, Fitch Ratings.

The gist of your report is that the impact of pandemic going forward is likely to pose challenges for the banking sector. You have said that not only credit cost will rise but even the NPA situation would get challenging. Most of the large banks say they have adequately provided for the challenges which lie ahead. What is your hypothesis for this space right now?
The hypothesis is primarily based on the premise that not everything that is arguably stressed is getting recognised at the moment as NPL, simply because there continues to be several forbearances in place as well as the judicial stay on some of the moratorium loans.

The number is roughly about 4% odd over and above the system’s NPL ratio which is roughly around 7%. But having said that, the 4% still does not account for the incipient stress including anything that is 30-60 days overdue and that is a number that has been on the rise quarter on quarter across the banks.

But more importantly, what it does not include are the several SME loans which have been refinanced under the various easy refinance schemes under the government’s relief measures and that cumulatively means that whatever the government is guaranteeing is just about 20% of the total exposure. The total exposure of those loans is roughly about 8.5% of the total system loans and when you start adjusting all of these into the number that we have at the moment, it is quite clear that at some point, whether it is easy liquidity condition or waning of some of the forbearances, it is likely to have an impact on asset quality. Whether that will manifest in the next financial year and whether some of it will get pushed further out because of forbearance measures being extended, we do not know, but it is quite clear that whatever banks are reporting while not being outside of our expectations, also does not present the full picture.

There is a race to bottom as far as home loans are concerned. Other consumer loans are also getting quite competitive. Meanwhile, fixed deposits rates etc also are in a race to the bottom. From here on, do you see rates hardening? How much do you see the additional borrowing cost for the NBFC universe? Will the banks face the same pinch?
Funding costs will be impacted. The declining funding cost trajectory has been a huge contributor to the fact that banks have continued to do well through a time of very limited growth. At some point, we do expect the funding cost to bottom out but if you were to consider the current liquidity situation, of which funding costs are a significant function, we expect that to continue at least for some more time, at least for a large part of this particular calendar year.

Any upward movement on the rate side will put pressure on the banks but what is important here is to also understand the inclination of the banks to lend now that it is being driven by two factors. One is credit demand itself which continues to remain reasonably subdued, at least as of now. The other of course is the bank’s ability to lend and in this situation, I have to call out the state owned banks which are constrained by virtue of the capitalisation.

Both of these factors are contributing to very limited credit supply. So without the inclination of banks to go out and lend in a meaningful way, it will not put pressure on the loan to deposit ratio which would therefore mean that banks might still have some headroom even after the rates start inching up for them, to be able to maintain their funding costs at low rates.

But quite clearly, what we have seen as of now is not sustainable because at some point we expect rates starting to inch up. You have raised a fairly valid point on retail credit and we have seen a fair bit of that and continue to see banks almost getting lock, stock, barrel into that space and trying to give out retail credit as much as possible.

It is quite possible that certain parts of retail credit, especially home loans, may prove to be a little more resilient than what we had expected initially and that was back in 2020 when things were very very uncertain. But there is also a large segment of unsecured credit cards within retail which are the usual suspects which we deem as vulnerable. You could also see vulnerabilities emanating on account of loan against property, loan against shares and some spaces which NBFIs dabble in a lot more than banks.

That is one space where we would see potential pressure in future. What is challenging with retail and to an extent even SMEs is that unlike large corporates which were pretty much the epicentre of the last asset quality cycle, it is very difficult to try and square in on an individual SME or an individual retail given how granular this portfolio is.

Banks would have to look at it on a portfolio basis but we are pretty mindful of the fact that a fair degree of underwriting has been done by banks over the last three to four years in certain cases quite aggressively and some of that underwriting is probably yet to see the right kind of seasoning yet. In times to come, clearly we will see some pressure and the litmus test of that portfolio.