Indian banks are undergoing a bad phase and are expecting the worst scenario in the future.
The Reserve Bank of India (RBI) is worried about the likely pile-up of Rs. 20 trillion in bad loans.
“The economic impact of the impact may result in higher Non-Performing Assets (NPAs) and capital erosion of banks. A recapitalization plan for public sector banks private banks has therefore become necessary,” RBI Governor Shaktikanta Das said in a statement last week.
He explains that there is going to be a severe impact of increased defaults by borrowers.
Defaulting of 1/20th of the loans, to under moratorium as of August 31, 2020, is expected to push the quantum of bad loans in Indian banks to Rs. 12 trillion.
If 1/5th of them default after lifting the moratorium, then the number will rise to further Rs. 20 trillion, double the current level.
It is no surprise about these numbers considering the former RBI Governor Raghuram Rajan’s statement that reads, “the levels of NPA will be unprecedented six months from now”.
With the rise in defaults, banks eventually need capital to keep running, and recapitalization would be the need of the hour.
Indicating a fall in incomes, around 5.58 million salaried employees across the country have withdrawn money from their Employee Provident Fund (EPF) accounts.
Many other individuals are not in a position to repay loans to banks or NBFCs.
Many of them have reportedly refrained from defaulting just because they can have a moratorium option under August 31, 2020.
Thus, defaulting of loans is expected to begin starting September 2020 after the moratorium option is lifted.
All banks have stopped recruitment due to the crisis. Surprisingly, the recruitment is happening in the loan recovery department.
Based on this, one can understand the situation of the loan repayment situation in India at present.
Unsecured loan categories like consumer durable loans, credit card outstanding payments, and personal loans are expected to suffer a lot.