When there’s discussion on use of MMT for deficit financing & monetisation to revive growth momentum, leading to higher output creation for generation of more jobs & wealth to set up formation of “virtuous cycle”, it wouldn’t be complete without getting banking sector up...1/N
Banking sector resolution needs shifted from bad to worse from pre to post C-19 impact. There’s lot of sound bytes in the public domain for need of more capital infusion or set up of bad bank or any other out of the box measure to resolve pre-Covid GNPA baggage of ~10%...2/N
Let’s keep aside pre C-19 baggage for now and focus on C-19 moratorium portfolio which needs resolution before 31st August. See 4 categories of exposures: (a) LTV of <75% (b) LTV of >75-<100% (c) LTV of >100% (d) unsecured (securities could be either movable or immovable)...3/N
Restructuring of loans with LTV of <75% is straight forward and that of LTV at 75-100% is doable with either top-up from borrower or in some other form by the lender, either converting additional debt as quasi-equity or “Tied” unsecured term loan with repayment adjustments...4/N
It’s tough to restructure loans where outstanding (as of 31st August) is more than 100% LTV or unsecured in nature, where reconstruction of the loan may be necessary. These will be entities worst hit from the lockdown (across large companies, MSMEs and individuals)...5/N
Reconstruction exercise (to avoid NPA) would involve sacrifice by both borrowers & lenders. There are signals that lenders are prepared for sacrifice (and have already provided for the same in Q1/FY21). Will borrowers have the intent & bandwidth or go into liquidation?...6/N
Resolution of this is the “make or break” story ahead for the banking sector. It’s critical that lenders & exchequer need to be prepared for sacrifice to limit GNPA for FY21 estimated at 12-15% up by 3-5%. It would need in principle binding of concerned stakeholders...7/N
Markets will be eager to hear from @RBI on this critical action point and not on policy rates or liquidity. Even if this is done, it’s not the end as focus will shift to management of combined NPA portfolio and ensure that reconstructed standard accounts don’t turn NPA...8/N
It’s not easy given high GNPA and low PCR and good that liquidity is not an issue, but sharing of credit losses & cost between borrower and lender & exchequer (taxpayers for PSUs) will set the tone. What about private sector banks that would be pushed to fend for the sector...9/N
Private sector banks would get categorised into (a) good to manage on their own with equity dilution (b) pushed into reconstruction, bail-out or bail-in.
These are big-picture scenario on banking sector going forward. Clarity on these will set up trend in India markets...11/11
These are big-picture scenario on banking sector going forward. Clarity on these will set up trend in India markets...11/11
