Veteran banker Uday Kotak has warned of a sharp spike in non-performing assets of the financial services sector, saying he wouldn’t rule out loan losses of Rs 4-5 lakh crore arising from the COVID-19 pandemic.
He added that he would watch for signs of recovery in the most-affected sectors and job stability very closely to gauge the health of the financial sector.
Speaking to CNBC-TV18, Kotak estimated that banks would need to be capitalised to the extent of Rs 2-3 lakh crore, explaining that the recent fund-raising spree by banks was a step in this direction.
“The banking sector’s total loan book is about Rs 100 lakh crore and you cannot rule out potential loan losses of 4-5 percent over time,” the managing director of Kotak Mahindra Bank said.
“Against that, there are some MTM bond gains but I still believe the financial sector will need recapitalisation of 2-3 percent of the loan book,” he added.
Banks have gone on a fund-raising spree recently to prepare for an expected onslaught of bad loans once the Reserve Bank of India lifts the moratorium on loans, which currently ends on August 31.
In view of the stress induced by the COVID-19 lockdown, the Reserve Bank in March allowed retail customers to avail a suspension of their loan EMIs till May while businesses could defer interest payments on their working capital loans. This scheme was extended for another three months till August. Some believe the RBI will offer another extension.
But with about a third of bank loans estimated to be under moratorium, bankers expect an NPA shock once the relief ends, prompting the fund raising drive.
“The financial sector is going all out to beef-up its reserves to be able to absorb the shocks coming out of the crisis,” said Kotak.
The key lesson for lenders from the crisis is to tighten their lending practices and make loans after taking risks into account.
While private sector lenders have been able to tap into buoyant equity market, public sector lenders have, as of now, zero help coming from the government, which did not pencil any amount of capital infusion in the February Budget.
Kotak also commented on the ‘dichotomy’ between equity markets, which have recouped most of the losses following a sharp fall in March, and economists who predict the recovery will be long-drawn.
“The stock market is ignoring short term issues and
“In my view, the economic recovery depends on the containment of virus and its cure,” he added.
Sectors like airlines, tourism, entertainment, hotels, restaurants had been disproportionately affected, the banker pointed out.
“If the job situation worsens, unsecured consumers will add risk. I will be watching for recovery in the most affected sectors and job stability very closely,” Kotak said.