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What Is Ailing Banking Stocks After Rs 20 Lakh Crore Stimulus Announcements?

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On Monday, banking socks took a beating as a reaction to the announcements made by Finance Minister Nirmala Sitharaman as part of the Rs 20 Lakh Crore COVID-19 related economic stimulus package.

Shares of major banks, that is SBI, ICICI Bank, HDFC Bank and IndusInd Bank closed 4 to 10 percent lower they reacted to the details of the stimulus announced in the last 5 days that have raised concerns of a possible increase in bad loans and provisions.

What Is Ailing Banking Stocks After Rs 20 Lakh Crore Stimulus Announcements?
ICICI Bank: Quotes, News
BSE 299.85BSE Quote22.8 (-7.60%)
NSE 300.00NSE Quote22.7 (-7.57%)
State Bank of India: Quotes, News
BSE 156.50BSE Quote9.9 (-6.33%)
NSE 156.50NSE Quote9.9 (-6.33%)
 

Suspension of IBC for a year

To benefit small businesses, FM Sitharaman in the 5th tranche of details towards the stimulus package said that it has been decided to suspend fresh initiation of insolvency proceedings up to one year under Insolvency & Bankruptcy Code (IBC) depending upon the pandemic situation as an "ease of doing business" measure. An exclusion of COVID-19 related debt/defaults was also announced.

While these measures may have been directed at benefitting corporates and businesses, it is expected to hurt banks looking for liquidation under the legal umbrella.

Experts say that there may be unscrupulous borrowers/promoters who may take undue advantage of the easement to delay and defeat the objects of IBC. It could give rise to another round wave of corporate NPAs (non-performing assets) as banks, especially those in the public sector are already dealing with stressed debt levels.

IDBI Capital noted that banks would not be able to put pressure on stressed accounts through the IBC route, which could result in deterioration of asset quality and subsequently higher provisions.

For the March-ended quarter, banks and NBFCs have reported a decline in their profit to make large provisions for COVID-19.

Loans to street vendors

As part of the stimulus package, it was also announced that a Rs 5,000 crore special credit facility will be opened for around 50 lakh street vendors to be able to avail Rs 10,000 loan to be able to re-start their business when lockdown restrictions are lifted.

Experts suggest that just like Mudra loan scheme, bankers, especially PSUs may now receive targets to disburse these loans once details of the credit facility are revealed.

 

There are multiple concerns with these loans that could result in them becoming bad debts.

Firstly, Rs 10,000 loans are considered low-ticket loans which typically commercial banks do not deal with. Street vendors generally borrow from microlenders or local money lenders who are familiar with the area of their business to assure that the loans are repaid. However, commercial banks will find it difficult to perform due diligence of these street vendors due to lack of credit history of those with unorganised sector income.

Further, General Secretary of All India Bank Employees Association told Moneycontrol that there are concerns that local politicians could get involved in making these loans available to the street vendors just like they have done in the past with Mudra scheme, for commissions.

Also, these vendors have been out of business for over 50 days and may be facing a cash crunch at the moment. It is likely that they will use the money from these loans to repay personal debts and make pending repayments rather than use the money to invest in their business as working capital.

Read more about: banking
Story first published: Monday, May 18, 2020, 16:32 [IST]
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