Economy V/S Covid-19



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I would like to begin by asking a simple question, do we have an idea? Anybody with accuracy can tell me, what we are heading for. I consider ‘no’. What’s the reason for my pessimism, it’s pretty clear, look around, the economy is readying for the worst, cases are rising, and lockdowns are in an on/off mode. Let’s talk about banks, it makes sense! 

The need of the hour

The current situation is, banks have given moratorium on loans, simply where people get to delay paying their instalments due to cash crunch. The pandemic is so apt for giving a moratorium. 

Sometimes, we need to be daring and take steps which can have severe repercussions, this is a perfect example. We can’t even predict how badly we are going to fall.  

Reality hurts

If five per cent of the loans default, we are seeing a loss of 12 trillion to the banks whereas the loan cycle is still functioning, which means we are seeing huge potential losses. 

On top of this, there’s unsecured credit such as personal/consumer durable loans. It’s high time and we need to address the chaos before it becomes too big!
‘The NPA levels would be unprecedented’
                 - Raghuram Rajan 

Explainer 

You were making decent money, thus you got yourself home or property by taking a loan thinking you’ll be able to service the EMI comfortably but unfortunately, you are stripped of your employment, you erode your savings and you’re barely left with anything!

You availed the moratorium offered by your bank but when this moratorium is lifted, how would you pay your instalments, how would you regain the ground lost? There’s uncertainty everywhere. 

Cost-saving 

What’s the cost for a bank?
The interest which it pays on deposits, salary to its employees and many more other expenses. Private Banks have therefore put new recruitment on hold, reduced the interest on deposits to save as much as possible. One area where hiring has gone up is the recovery area. To get more people to recover the losses. 

Old wine, new bottle

Public sector banks have 40-50% of its loan book under the moratorium, midsized banks have 50% & the private ones have the least, 20-30% it’s pretty understandable, the larger the number gets, the worse the picture! 

The banks have been dealing with ‘bad loans’ since a decade now. So, yes, this is not something new. There are so many sectors which are sitting on huge debt which ultimately becomes non-performing, sectors such as Power, Real Estate etc. You don’t know what mess we are in!

Hidden cost

If you’re thinking it’s better to opt for a moratorium, think twice. Interest due under the moratorium period would get added to the principal. So, effectively you’ll end up paying much more. If you go for a moratorium just because it is provided then you’ll probably suffer. If you need it, opt for it, otherwise, it’s better to pay. 

Shadow banks

You must have encountered this term before; it is used to define all those institutions which operate as a bank but not with a legit license. These shadow banks lend or borrow from the banks therefore there’s a ‘chain’. 

If you have taken a vehicle loan from an NBFC, which you default it would leave them worse off. As of May, 52% of the loans offered by NBFC’s were under a moratorium. I wouldn’t be wrong if I say that moratorium is nothing but a pill to keep the giant asleep! 

No credit flowing

This issue is around for quite a long time now, there has not been a significant off-take in credit flow from the banks despite so many measures by the government. When there’s no credit flow, the businesses are uncertain of the economy, therefore no demand, no employment. Do you understand the chronology?

Everything’s aggravated! 

You know what; we can live with this bad loan issue if the recovery is robust but despite initiatives such as IBC (Insolvency & Bankruptcy Code) the rate of recovery has fallen from 22% in Financial Year 2013 to 15.5% in Financial Year 2019. This simply translates that banks now can recover 15.5 rupees out of 100, which earlier were 22!

Accept the situation

It’s human tendency to not acknowledge or envisage worse situations, for long we had the attitude of kicking these bad loans down the road. Ever heard of restructuring? A very good way of postponing NPA’s. Banks offer longer tenure, reduced interest rates to retrieve the principal. 

Conclusion 

To wrap it up, I believe that real tensions would surface after August as the moratorium is lifted, we will get to know the real losses. Therefore, every private bank is raising funds to be secured from the downside!

We have been successful in keeping the volcano silent till yet but it will explode soon. At the end of the day, the bank reflects the true picture of the economy, it shows you the symptoms! I leave the job of doing the scary math to you, it gets scarier as you dig deeper. 

Written by – Manvinder Arora  
Edited by  Ivanova






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