No easy task

During the pandemic, banks were afraid of rising non-performing assets (NPA). However, many corporate houses are avoiding restructuring of loan accounts, as they fear that restructuring the loan accounts will damage their reputation in the market and they will not be able to raise capital from the market at a competitive rate. For this reason; till now; very few corporate houses have applied for the restructuring of loan accounts. However, this is a positive situation for banks, because if large accounts are not restructured, banks will not have to make provision of a higher amount for NPA.

Both corporate houses and banks will suffer losses if restructured accounts fail. It is also true that both will be benefited if the restructuring becomes successful, but the amount of benefit would be less if they fail. Therefore, large corporate houses do not want to opt for restructuring. This process will also be painful for the bank because the human resources will take more time to manage the restructured accounts and the bank resources will also cost more.

In the current scenario; Banks have succeeded in convincing corporate houses not to restructure, as it will financially damage them more. It is also true that corporate houses have surplus amounts due to provision of a six months moratorium and arrangement of giving emergency loans to all the borrowers by the bank. Owing to this, many borrowers are reducing their loan portfolio.

Analysis of the sector-wise distribution of credit showed that loans from sectors like metal and metal products, petrochemical, power, Non-Banking Financial Company (NBFC), real estate, textile, FMCG, pharma, chemical, health, consumer durables, vehicles, etc. have opted for the moratorium, however, these sectors have low debt and they are not facing liquidity problem. They have taken such steps only because of the current uncertainty environment.

Currently, due to the deferment of loan instalments and interest, the businessmen have surplus amounts, which they are either using to reduce their loan portfolio or to increase their business by importing raw or finished goods. For this reason, the import of miscellaneous goods is increasing.

Analysis of the data also shows that there has been no increase in the lending rate in the last 6 months. Not only this, non-food credit has shown a negative growth of 1.02 per cent in September 2020 in comparison to March 2020 in this period. At the same time, credit growth in medium enterprises and agriculture and allied activities grew at a rate of 13.84 per cent and 3.17 per cent respectively during this period.

It has also been observed that between March 2020 and September 2020, the credit growth rate in most sectors has been negative. Only a few sectors like metal and metal products, vehicles, vehicle parts, transport equipment, hotels, restaurants, etc. have registered a slight increase due to having surplus amount due to provision of the moratorium of loan set by Reserve Bank of India. Besides, the corporate houses have also received surplus funds owing to increased duration of the working capital cycle.

The analysis also shows that there is a credit balance of Rs 32.6 lakh crore in these areas. According to an estimate, only 15 to 20 per cent of the corporate houses have applied for restructuring in view of the negative impact of the restructuring. Most corporate houses fear that if they opt for restructuring, they will find it difficult to raise capital from the market and rating agencies will downgrade their ratings to the lowest level. Therefore, it is being estimated that the restructuring amount will not exceed a maximum of Rs 1 lakh crore.

Despite this, in the current perspective, there will be pressure on micro, small and medium enterprises (MSME) and agriculture and allied sectors. In such a situation, the possibility of an increase in NPA cannot be ruled out completely. Although the NPA has decreased in September 2020 from March 2020, it is expected to increase in the coming quarters. A large number of agricultural loan accounts have not been renewed due to the lockdown, due to which agricultural loan accounts may be converted into NPAs technically.

According to the Reserve Bank of India's Financial Stability Report 2020, the overall NPAs of all scheduled commercial banks (ASCBs) may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021. It can also reach 14.7 per cent level as credit risk increases.

An analysis of the financial results of the 800 listed companies shows that most companies are reducing their loan portfolios so that they do not face liquidity problems. In the first half of FY 2020-21, these companies have used liquid assets, cash and bank balances to reduce their loan portfolio. Except for FMCG, edible oil, pharma etc. Most of the companies have not done well in the first quarter of the current financial year, but they have done well in the second quarter.

However, the financial results of listed companies like cement, capital goods, packaging, automobile, consumer durables etc. are good. Out of 800 listed companies, all except the refineries and telecom have recorded growth of about 10 per cent in both EBITDA and PAT. Compared to the second quarter of FY 2020, the revenue of the telecom sector grew by almost 12 per cent, while its loss decreased by 90 per cent in the second quarter of FY 2021.

Hotels and restaurants, air transport, service, manufacturing, retail, textiles, diamond, gem and jewellery, leather, etc. have registered double-digit growth in key financial growth parameters including revenue collection. Cost reduction has been done in these areas. In many areas, the cost of staff has been cut from 5 per cent to 30 per cent.

In the second quarter of FY 2021; in some areas; Exports have grown faster than the previous quarter. For example, rice exports have registered a gradual increase of 12 per cent, while a 65 per cent increase on a year-on-year basis. Exports in meats & dairy, iron ore, gem & jewellery, drug & pharma, cotton yarn, fabrics, handloom products, textile sector etc. grew by 7 per cent on a year-on-year basis, while a gradual increase of 93 per cent.

The pandemic can be said to have caused unexpected damage to the economy. The government is trying its best to get the economy out of the crisis, but the expected results are yet to come.

The writer is the Chief Manager in the Department of Economic Research at the Corporate Centre of State Bank of India, Mumbai. Views expressed are personal