1. Will retail loans go sour?
Quite likely, yes. And the unpleasant numbers will show up in January and April 2021, when banks start to disclose asset quality through their quarterly earnings data. Even as much confusion prevails on whether banks will be granted more time to restructure loans—considering that the Supreme Court is hearing matters relating to waiver of interest—most have resorted to upfront provisioning, fearing deteriorating asset quality in the months gone by. But restructuring the loans will not solve the problems for banks, it will only delay them.
Rather than large corporate loans, the pain point for banks is likely to come from unsecured loans, particularly personal loans, education loans, credit card debt or a small vehicle loan. Individuals who have seen job losses or salary cuts or small businesses where revenues have come to a grind have struggled to repay loans.
Between April and October 2020, the bounce rate on auto-debit transactions has been high at an average of 40.4 percent in volume terms and 33.5 percent in value terms, compared to year-earlier levels of 29 percent and 23 percent respectively, for the same period. This was on transactions through the National Automated Clearing House (NACH).
Most bankers fear the worst for the retail loans segment. “The meter is running on the retail side. For the industry, overall slippages are bound to increase,” says Amitabh Chaudhry, managing director and CEO of Axis Bank. These non-performing assets (NPAs) will be higher than what the financial system has seen in the recent six to seven years.
Banks and non-banking financial companies have been struggling to reduce their NPA levels. The overall gross NPA ratio has come down to 8.5 percent for all banks in FY20 from a peak of 11.2 percent in FY18. But this has meant banks, particularly state-owned ones, are seeking recapitalisation to stay alive while making higher provisions. Survival, rather than growth, became the mantra for most.
But even prior to the pandemic, banks had become risk averse and focussed on cleaning up their balance sheets. During the pandemic, most private banks managed to raise fresh capital and have also seen a surge in deposit growth. All this has meant that the Indian financial system is better positioned than it was during the previous financial crisis. It also means that India might be poised for improved credit growth in two to three years, as macro conditions improve.
2. Will India come out of technical recession?
Yes, but this will mostly be due to a statistically positive base effect of 2020. It does not mean the economy would be roaring back to pre-Covid-19 levels.
India entered the technical recession in 2020, clocking two successive quarters of year-on-year negative GDP growth. When business activity came to a near-standstill between April and June, halting the manufacturing and services sectors, the GDP contracted 23.9 percent, the worst on record since quarterly data started in 1996.
As the unlocking of economy commenced in July, there was a sharp improvement in agricultural, manufacturing and industrial activity, construction (across some states) and transport and domestic trade. All of this led to a better-than-expected recovery, but the degrowth continued by 7.5 percent for the three months to September.
Economists and rating agencies expect economic activity and growth to improve sequentially in the Q3 and Q4 of FY21. Some analysts expect India to turn marginally positive in the January to March 2021 quarter.
A clearer upswing, however, will be seen by mid-2021. “We will definitely climb out of the recession in FY22, barring any major unforeseen shock,” says Bandhan Bank’s chief India economist Siddhartha Sanyal. “The start of the next financial year ( Q1FY22) will also see a very high number, thanks to the base effect of a year ago, the normalisation of social and business activity which people will force themselves to resume and hopefully a lean patch in the pandemic as vaccines are made available.”
Statistically we may cheer the bounce back, but a meaningful recovery will only be possible through sustained rise in private consumption (which accounts for around 58 percent of our nominal GDP) and government-led capital expenditure. The share of private consumption to GDP remains subdued with consumer confidence low due to concerns over job security, income growth and expenditure towards health.
But moving into the middle of 2021, we could see some more nomalisation in demand for consumer staples and consumer durables. Other aspects of spending towards travel and hotels for leisure are also likely to improve. And the Reserve Bank of India (RBI) is likely to stay supportive in terms of interest rates.
3. Will US-China relations continue to deteriorate?
As Joe Biden takes over as US president, expect a swift reversal of Donald Trump’s policies. One area where there is unlikely to be significant change is US-China relations. There is now broad consensus among the US political class that China is fast morphing from a partner to an adversary. The sooner relations are redefined to reflect that reality the better.
Chief among US concerns is China’s shift towards a more authoritarian state as well as the belief that it is not playing by the rules of the global trading order. Last has been its threats to Taiwan and the throttling of Hong Kong’s protesters though the imposition of a national security law.
In the last year, China has moved to stifle Uighurs through mass detentions as well as indoctrination camps in the country’s remote western provinces. This has resulted in the US imposing sanctions on Chinese state companies as well as officials. What is clear is that disapproval from the West has not deterred China from continuing with its policies.
On the trade front, the imposition of tariffs on Chinese imports to the US has failed to slow their growth. In 2016, the trade deficit with China was $347 billion. In 2019, it was lower marginally at $345 billion despite the imposition of 5 to 25 percent tariffs on select Chinese imports.
Last, there have been belligerent moves towards Taiwan with naval exercises close to its coast as well as assertions that China may move to reunify Taiwan. Add to that the confrontations its navy has been getting into with its US counterparts in the South China Sea and it’s clear that China is biding time till its forces are able to mount a challenge to the US military.
All this has meant that global companies have begun to derisk their supply chains and adopt a China-plus-one strategy, with India, Bangladesh and Vietnam being looked at as manufacturing destinations.
The year 2021 could see the US-China relationship undergoing a permanent reset—this time to a more adversarial one.
4. Will foreign inflows continue to power Indian markets?
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