Bank loans under bad debt threat

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Even as creditors in India continue to face risks around asset quality, Moody’s investors’ service said that corporate loans are not the worst positioned this time. Banks remain under the highlight amid the economic contraction aided by the coronavirus pandemic. But, not like the previous credit cycle where loans to corporate borrowers were resulting in non-performing assets (NPA), Moody’s says retail and SME credit is likely to be worse this time. Banks have so far provided a 6-month moratorium to borrowers across the country and now a restructuring of choose loans is in the offing. 

Even though risks aligned with corporate loans would possibly have decreased from the previous credit cycle, they are now not resistant to the economic contraction and its effects. Moody’s highlighted that a massive number of large and mid-size companies said EBITDA contraction in the April-June sector from the preceding year. But, sectors like transportation and hospitality are the most vulnerable in the light of the pandemic but their exposure to banks is small. 

Coming into this credit cycle, Moody’s says that corporate loans for banks are better positioned than they previously were because of the risk-averse nature of the lenders and with most of the weaker corporate loans already labeled as Non-performing loans (NPL). With exposures to most corporates with susceptible financial health having been recognized as NPLs, currently performing loans are better located to withstand stress. Somewhere between 15-20% of the overall corporate debt has already been classified as NPL of which most big corporate loans have been referred for resolutions with banks making adequate provisions. 

Additionally, large companies with weak debt coverage ratios have been at the decline. The proportion of debt with an interest coverage ratio of much less than 2 has reduced to 12% and 27% for large and medium-sized corporates respectively at the end March 2020 from 22% and 35% in March 2016. 

On the other hand, Moody’s is predicting that the coronavirus outbreak will strain finances for households and small businesses. Job losses resulting from disruptions to economic activity and subsequent reductions in household income will lead to a deterioration of retail loan quality. The performance of loans to small businesses has already started weakening and the supply chain disruptions coupled with slow demand will make matters worse. Moody’s stated that public sector banks have a large corporate loan share however their lending to SMEs is large as well. Alternatively, private banks have exposure to consumers more than public lenders. 

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