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

While banks may not face pressure on asset quality, their income statements may be hit.

Terming the 3-month moratorium on term loans by the Reserve Bank of India (RBI) as the most-needed ammunition to withstand the lockdown, bankers and industry observers said this would bring the required relief to banks’ asset quality.

As most lenders feared that their customers’ repayment ability might be impaired due to the lockdown, Friday’s move has allayed the fear.

Nilufer Mullanfiroze, senior vice-president (retail lending and cards) of Federal Bank, said: “For the right set of customers and firms, if the interest burden reduces for three months, it will have a positive impact on banks and customers.”

However, the flip side is that while banks may continue accounting for instalments due between March 1 and May 30, there will not be a corresponding cash receipt entry in their books, if all customers opt for the moratorium.

In other words, this income will be treated as ‘income accrued but not received’. To that extent, Abhinesh Vijayaraj of Spark Capital feels this could dent the book value or net worth of banks by 0.5-2.0 per cent, depending on how many customers opt for the moratorium. Therefore, while banks may not face pressure on asset quality, their income statements may be hit.

Another aspect to be seen is the short-term asset-liability management (ALM). One could say that banks do get the advantage of repo and reverse-repo cut of 75 basis points (bps) and 90 (bps), respectively, making it a strong case for re-pricing of liabilities at a lower rate.

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

“Not all instruments automatically re-adjust to lower rates that could, in the interim, put some pressure on banks’ profitability,” said a treasury head of a private bank. Further, even as the reduction in cash reserve ratio (CRR) and marginal standing facility (MSF) adds to banks’ liquidity to create a buffer and protect for ALM, whether they can really use this for the purpose is doubtful.

Experts say the RBI’s clear mandate that this surplus has been given to banks only to spur loan growth, takes away the window of parking the money in short-term instruments, which would have otherwise helped them manage the ALM and generate some treasury gains.

This, in turn, would have strengthened their financials. With this option not available, analysts say a 10-40 bps reduction in net interest margin (a measure of bank’s profitability), appears likely.

Another blow, though not entirely linked to moratorium, could come in the form of lower non-interest income. This metric draws its strength from volumes transacted during a period, which are typically fixed charges payable by a customer (such as loan processing fees).

In a scenario of weak net interest income (NII) growth, non-NII revenues have largely helped banks. For instance, private banks such as HDFC Bank, Axis Bank, ICICI Bank, IndusInd Bank and even some state-run banks such as Bank of Baroda and State Bank of India, have witnessed faster growth in non-NII revenue, compared to NII revenue, in the last three quarters.

As the loan disbursement thread weakens, bankers say they may have to forgo some of the fee income if loan products have to remain attractive for customers.

They say forgoing some fee income is critical to arrest a decline in loan growth, which most banks are already witnessing.

“From 30 per cent-plus non-NII growth, the growth rate of non-NII revenue may fall to 15-20 per cent,” says an analyst from a domestic brokerage.

This is why bankers feel the exact financial impact of the loan moratorium may be felt most in the June quarter. While most banking stocks took the RBI’s move positively, analysts say the financial impact of the moratorium will most likely reflect on their stocks when they reopen on Monday.