Ticking Time Bomb

Up to ₹40 lakh crore worth of loans of banks are under six-month moratorium. The risk of default looms large

- Anand Adhikari

Sanjiv Bajaj is not known to mince words. The 50-year-old Bajaj family scion, who runs India’s largest non-banking consumer finance company with 43 million customers, has been vocal in opposing the six-month moratorium on loan payments announced by the Reserve Bank of India (RBI) to help borrowers tide over the cash crunch due to the Covid-19 lockdown. “It can alter credit behaviour of customers,” warns the younger son of industrialist Rahul Bajaj.

This vice chairman of Bajaj Finance has a point. Consider the moral hazard created by massive farm loan waivers that has affected credit discipline of farmers. “A longer moratorium does bring a risk if things are bleak on the economic front,” says Chandan Sinha, a Director on board of State Bank of India, India’s largest bank. But Sinha, who has had a long stint with the RBI, says, “Things have to look up.”

This is what every banker must be praying for considering the huge loan payments that are stuck because of the moratorium. Under the moratorium, which ends in August this year, banks and non-banking finance companies (NBFCs) do not have to classify loans that turn bad during this period as non-performing assets (NPAs). This means the first batch of Covid-related NPAs will hit the street in the December quarter. The exact damage will be known only by January next year.

New NPA Cycle

Bank NPAs fell for the first time in seven years in FY19, when gross NPAs settled around ₹9 lakh crore, roughly 9 per cent of advances. But before bankers got any breathing space, the lockdown set the ball rolling for a new NPA cycle.