Hodgepodge of rising NPAs, optimism in mutual funds and growth in prosperity. What does the future holds for us?

The COVID-19 pandemic has been hitting the economic,” social educational and cultural fabrics of our society around the world. There have been inventions and bad news rolling in the air simultaneously. One such bad news is the rise in bad loans. A large number of large banks and non-banking financial companies (NBFCs) are facing challenges because of an increase in bad loans due to rising economic stress across every sector. This rising stress is starting to affect the repayment capacity of the borrowers, hence rising bad loans.

According to financial analysts, non-performing assets (NPAs) will record a jump from 8% in the previous fiscal year to 13 to 15% in the year 2021–22. This 13 to 15% is because there has been help by the government in the form of restructuring, write-off, regulatory relaxations, including loan moratoriums.

Why is there a sudden increase in NPAs?

NBFCs, micro-finance institutions and banks are reporting an increase in stressed assets. “Small entrepreneurs operating in segments such as salons and restaurants, taxi operators in merchants oblique traders and non-essential categories have been hit hard, there has been no specific income support to the started groups. There has been a spectacular spike in NPAs in the category“, according to a senior private banker.

World Bank and international monetary fund IMF are also concerned due to decrease in the spending on luxury and non-essential items; therefore, the new policy worldwide is to increase spending by borrowing more. The world is shifting away from Washington Consensus, and till 2030 the debt to GDP ratio of every country will be around 150%, which will be the new normal. Due to lockdowns and closing down of economic activity, financial prospects of every business has been hit, resultant non-essential services like restaurant, resorts, salons, aviation, construction, high contact services, amusement parks, luxury clothing, jewellery et cetera have been reporting less business.

Care rating has also forecasted an increase in non-performing assets; they expect the NPAs to rise beyond 15% in the coming year. Due to poor business, loans taken by small merchants are not being repaid timely because of which banks have to take economic haircuts and write-offs. NBFCs and banks before Coronavirus were able to collect dues physically; the current environment does not foster this mechanism even if the borrowers are ready to pay instalments. Loss of jobs, income, family members have broken the spirit of the common man and repayment of loans is the last thing on his mind.

What are top financial institutes saying about NPAs?

Bandhan bank reported an 80% fall in net profit for the quarter, which ended in March due to extra provisions on NPAs. Bandhan bank specialises in micro-enterprise loans, which is now the main reason for increasing bad loans. The micro-enterprise loan provides working capital aid to small traders, business and services. Gross NPAs rose from 1.48% in the financial year 2020 to 6.81% in the financial year 2021.

Bajaj finance, in its mid-quarter report estimates the NPAs to be higher due to stressed assets. The second wave has increased the EMI bounce rate slightly. Forward flows were higher on overdue positions due to problems in the collection process because of strict lockdown in almost every part of India. Forward flow is a type of arrangement where an asset (loan) is bought by an investor from a third party at an agreed price and eligibility criteria of loans in advance.

Punjab National Bank (PNB) said that the impact of the COVID-19 pandemic on future developments depends on the pace of vaccination and other measures imposed to curb COVID-19 spread. Banks will have to work on stopping the erosion of cash flows and extended working capital cycles which will delay repayment.

The Reserve Bank of India has also warned of a double-fold increase in bad loans from 7.5% to 13.5% by September 2021. Tarun Bhatia, MD and head of business intelligence and investigation Kroll South Asia, mentioned that the moratorium and various schemes given to the banks, the correct number of NPAs could not be determined. To determine the actual number of companies that opted for moratorium versus companies that paid a few instalments need to be weighed. But due to the second wave of COVID-19, people who opted for a moratorium would still struggle.

After Supreme Court’s verdict on bad loans and asset classification, the actual number of bad loans will come forward. After the verdict banks and NBFCs have to record their NPAs as per the actual days past the due from quarter 4, after which moratorium was declared.

Why are Mutual Funds and Prosperity Report singing a different tune?

According to a prosperity report by Boston Consulting Group (BCG), financial wealth in India will rise by 11% per annum which will result in $3.4 trillion. The report projected India to lead the growth of fortune worth a hundred million dollars in 2025. India will achieve this feat because according to BCG India’s regional assets grew from 12.1% per annum to 13.7% per annum to $12.4 trillion. Liabilities which were pegged at 9.4% increased to 13.3% and are expected to grow till 2025 resulting in $1.3 trillion. It is said that the bonds are expected to prosper rapidly with 15.1% and life insurance and other pensions will become the third-largest asset category in future.

The report says that North America, Asia and Western Europe will be the forerunner of new financial wealth pulling the world out of stagflation. They will account for 87% of new financial wealth growth worldwide till the year 2025. People are now shifting away from low yield debt securities to real assets like real estate ownership. Asia alone accounts for 64% of the real asset ownership worth $84 trillion will see an increase in the asset worth in coming years. Also, Asians feel secure when they invest in something tangible, hence Asia accounts for the largest concentration of wealth in real assets.

The mutual fund is also singing the same tune, the industry witnessed maximum net inflows in March 2021 since March 2020. This optimism owes itself to no lockdown policy opted by the central government. States were given the freedom to impose complete or partial lockdowns because of which economic activity did not fully stop. Robust earnings from March kept investors afloat, because of which investments poured in May. A slump in the number of Covid cases recorded per day and the recent announcement by the Prime Minister regarding the procurement of 75% of the vaccines by the centre heightened the enthusiasm of investors.

Significant data has been collected regarding the rise in power consumption, vehicle registration, e-way bill generation, railway freight, et cetera that suggest that economy is coming back on track. International investors have also started investing as per NSDL data, Foreign Portfolio Investment (FPI) in May recorded an outflow of capital. In June the FPI net investment stood at Rs 14,078 crore. Investors poured Rs.10,082 crore into equity-oriented schemes in May.

Investors put in 25,000 crores in equity schemes in the last three months. Some investors who were staying low last year and saved money are now back investing. The first wave of Covid shows that these waves are for a short period. After some time, things start coming back on track. People invest in dips (bear period) because they know that the value of an investment will rise after some time as economic activity increases.

The confidence in the stock market may be high, banks may record high NPAs, inflation is still increasing but nothing is permanent.