No new business, little profit: Banks face the squeeze

MUMBAI: Indian banks will have to brace themselves for a prolonged period of lower profits resulting from a hit in revenues and almost zero new business due to disruptions induced by Covid-19. Experts see a sharp drop in transactional fee income, while disbursements are also expected to come to a standstill.

“If the last quarter is anything to go by, we expect banks will see a negative operating leverage due to less revenue because their costs will remain the same,” said Rajiv Mehta, lead analyst, Yes Securities.

“They will see a significant dip in their fee income, and I don’t expect banks to make much business in Q1 FY21. If the pandemic outlives the moratorium, we will have to see if the flexibility will be extended by the RBI.”

The Reserve Bank of India allowed deferral of interest/principal payments on term loans and working capital loans for a three month period but secured the banks interest by allowing them to accrue interest on these loans.

As per the RBI directive, banks will be able to accrue income on these loans while auditing their accounts and only the payable date of these loans will change. Bankers put up a brave front and said that their profits would not be impacted by this move.

“Bank profitability will remain unchanged, because accrual of income or payment of interest on deposits does not stop, only the payable date gets changed,” said Rajnish Kumar, chairman, State Bank of India.

“The other thing is you get dispensation on recovery. Some of the accounts which may have had to be classified as NPA in March and June get pushed, and to that extent there is relief.”

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Banks also got a cheer from the RBI on asset quality and loan provisioning fronts, with the regulator allowing rescheduling of payment due dates. Banks are likely to benefit by delayed provisioning rules and deferment in norms to classify bad loans. Analysts said that it would effectively mean an asset classification leeway of nearly six months, starting April 1.

“The asset classification of term loans granted relief shall be determined on the basis of revised due dates and the revised repayment schedule,” the RBI said in a circular.

Indian banks are already in precarious asset quality and liquidity situations. With the outbreak of Covid-19, the banking sector might witness an adverse impact on credit delivery and asset quality, leading to pressure on capital adequacy.

According to a CARE Ratings analysis of 38 listed banks, their bad loans increased to Rs 9.4 lakh crore at the end of December. Public sector banks alone contributed Rs 7.2 lakh crore to the bad loan pile.


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