Explained: Why banks are worried about second Covid-19 wave

Banks in the country are worried about the rising number of Covid-19 cases, which have led to localized restrictions in various states. Banks fear that loan defaults will rise if businesses face economic losses due to stricter Covid-19 restrictions.

Banks in the country are worried as the second wave of the Covid-19 pandemic has hit economic activity in various states. Already battered by a wave of loan defaults, banks are in no position to afford more stress in the current financial year. But they have no choice but to brace for the worst as the pandemic threatens to derail the economy once again.

On Wednesday, India reported a daily spike of over 1.8 lakh Covid-19 cases, breaking all previous records. And in the past eight days, India has reported over one lakh daily cases on average.

The sharp rise in coronavirus cases in the country has led to localised restrictions like lockdowns and night curfews in various states, and businesses are already feeling the impact of the second wave.

WHY ARE BANKS WORRIED?

If these restrictions continue throughout May, many businesses would be forced to permanently shut shop as they were grappling with revenue worries since the nationwide lockdown was announced in 2020.

If some of these businesses fail, it will lead to another wave of unemployment. The end result could put pressure on banks as many individuals and businesses will be unable to repay loans, triggered a second wave of defaults.

Last year, the Reserve Bank of India (RBI) had come to the rescue of both borrowers and banks by announcing a moratorium on loan repayments. It helped banks keep the defaults off their balance sheets and did not impact asset quality.

However, the possibility of a loan moratorium being announced this time is bleak and banks will feel the full force of defaults if the pandemic situation worsens. India Today had recently reported that non-performing assets at Indian banks could nearly 10 per cent in FY22.

To make matters worse, the Centre has been hesitant in bearing the Rs 7,000 crore compound interest waiver bill after the Supreme Court ruling. If banks are forced to foot the entire waiver bill, it would further weaken their position.

It may be noted that the Supreme Court had directed banks to waive the compound interest (interest on interest) on loans for all borrowers during the moratorium period from March to August 2020.

LOCKDOWNS AND BANKING SECTOR

The lockdowns and restrictions announced in some states like Maharashtra will not only lead to a massive loss in economic activity but will also hurt banks in the country.

According to a livemint.com report, a quarter of all banks loans have been made to individuals and businesses in Maharashtra. The financially important state accounts for almost 24 per cent of loans from commercial banks. In such a scenario, rising defaults due to lockdowns could directly hurt banks.

While bankers are worried about restrictions, they are hopeful that harsher restrictions like complete lockdowns will not be announced like last year. Most of them believe that free movement of goods will make this round of lockdowns easier for businesses to tackle.

BIGGER WORRY

While complete lockdowns are unlikely during the second Covid-19 wave, localised restrictions have already derailed India’s economic recovery in the first quarter of FY22.

According to a report, the economic loss due to localised lockdowns could be nearly Rs 1,000 crore per week. The unemployment rate has jumped since April, according to the Centre for Monitoring Indian Economy (CMIE).

Read | Covid-19 2nd wave may cost India Rs one lakh crore

If the economic challenges persist for a prolonged period, banks in the country may not be able to offer much support as they are already tackling increasing loan defaults. It is worth mentioning that 80 per cent of the new infections are being reported in six states which account for 45 per cent of banking sector loans.

In a scenario where banks are not capable of supporting new businesses and industrial expansion, the challenge for economic recovery and growth could be much harder after the second wave.