Moody’s Raises Concern Over Non-Performing Retail MSME Loans

Well, some experts are saying that its a chicken and egg story getting repeated. Well, MSMEs are in need of funds, financial support, on the other hand, economic revival is not possible without the growth of MSMEs. With such an outlook, banks must remain open and supportive towards MSMEs the way top-level policymakers visualise them to act. But, on the contrary, the possibilities of new Non-Performing Loans (NPLs) can never be ignored. After all Banks are dealing in the public's money. With a proactive approach towards MSMEs, the threat of NPAs is also accelerating substantially, driven by the retail and Micro, Small and Medium Enterprises (MSME) segments, this is quoted by Moody's Investors Service.

Moody's said Indian economy will contract sharply in the fiscal year ending March 2021 (fiscal 2020) before returning to growth, though modestly, in fiscal 2021.

''A sharp contraction in the Indian economy in the fiscal year ending March 2021 (fiscal 2021), before returning to modest growth in fiscal 2022. Even before the coronavirus outbreak, the economy had already been growing at its slowest pace in six years,'' it said.

''Moody's expects retail and MSMEs will lead a rise in nonperforming loans (NPLs), delaying the ongoing clean-up of legacy corporate NPLs,'' it added.

It also said that Public sector banks (PSBs) will need external capital of up to Rs 2.1 lakh crore over the next two years and the most likely source to plug this shortfall will be government support.

According to Moody's, the sharp slowdown in India's economic growth, exacerbated by the coronavirus outbreak, will hurt public sector banks' (PSBs) asset quality and drive up credit costs.

"We expect to see PSBs' already weak capital buffers to be depleted, with INR1.9 trillion-INR2.1 trillion ($25 billion-$28 billion) in external capital needed over the next two years to restore loss-absorbing buffers," says Alka Anbarasu, a Moody's Vice President and Senior Credit Officer.

"PSBs dominate India's banking system, meaning any failure could jeopardize financial stability," adds Anbarasu. "As such, we expect government support will remain forthcoming."

It said banks will face large capital shortfalls again as credit costs rise. Of the total capital requirement amount, PSBs will need about Rs 1 trillion to build loan-loss provisions to about 70 per cent of NPLs, which will leave them with enough capacity to grow loans 8-10 per cent annually, faster than the 4 per cent in fiscal 2020.

Moody's said to maintain financial stability, the government will continue to provide capital support for PSBs.

Uncertainty surrounding India's economic recovery and the ongoing clean-up of balance sheets are making it difficult for banks to raise equity capital from markets, leaving the government as the obvious source.