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Published on 23/05/2020 12:11:40 PM | Source: Motilal Oswal Financial Securities Ltd

NBFC Sector - RBI extends moratorium till Aug`20 by Motilal Oswal

Posted in Broking Firm Views - Sector Report| #NBFC #Sector Report #Motilal Oswal Financial Services Ltd

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RBI extends moratorium till Aug’20

Provides adequate time to borrowers; lenders to walk tightrope to avoid unintended damage

* The Reserve Bank of India (RBI) has announced further set of measures to enable the banking system to bear the impact of the COVID-19 led disruptions. The RBI, thus, has extended the moratorium/standstill benefit by a further three months (up to 31st Aug’20).

* The RBI has also reduced the policy rate by 40bp, resulting in repo/reverse repo rate of 4.0%/3.35%, thereby driving further reduction in the borrowing cost.

* Further, the RBI has asked all lenders to convert the accumulated interest of six months on working capital loans into a Funded Interest Term Loan to be repaid by Mar’21. This comes as a big relief to borrowers, who otherwise would have been required to make a balloon payment, thus, causing undue financial distress.

* The RBI also announced certain other measures such as (a) increasing the group exposure limit of banks from 25% to 30% of eligible capital base, and (b) further extension of SIDBI’s Special Refinance Facility of INR150b at the RBI’s policy repo rate for a period of 90 days.

* We believe that the extension of moratorium is a step in the right direction as economic activity is still in a nascent stage of recovery and borrowers would need more time to recuperate from the COVID-19 crisis. However, banks need to work actively with borrowers and ensure that moratorium gets availed in deserving cases, and at the same time, prevent any moral hazard. The trend in collection efficiency would become an important barometer of banking health as the book under moratorium might remain elevated for the next few months.

* We prefer large private banks as they have strong coverage, contingent provisions and robust PPoP to provide for any potential credit losses. Top picks – HDFCB and ICICIBC.

 

Moratorium extended by another 3 months; Additional provisioning to get some respite as NPA recognition defers

In continuation with its earlier announcements, the Reserve Bank of India (RBI) has extended the moratorium of term loans by a further three months till 31st Aug’20 to ease financial stress. Consequently, the payment of interest on working capital facilities too gets extended by three months along with the extended period getting excluded from the 90-day NPA norm and not resulting in asset classification downgrade. In addition to this, timeline for the resolution of large accounts also gets extended by another three months, which would extend the period for making additional provisioning of 20% on such delayed accounts and offering some respite on provisioning to the underlying banks.

 

Moratorium book at ~25-35% for large banks and higher for smaller banks; remain watchful of collection efficiency in near term

We believe that this measure would give some breathing space to borrowers facing cash flow strain to revive and reorganize their business over the next few months. However, this could further result in an increase in customers availing the moratorium. As on 30th Apr’20, many large banks indicated that the proportion of customers availing the moratorium has been in the range of 25-35% (in value terms) while for small finance banks, the moratorium has been much higher. For instance, moratorium for Equitas/ Ujjivan stood at 93%/90% and for BANDHAN ~70-75% of total portfolio. Although incidence of moratorium is expected to increase, the trend in collection efficiency as the economy starts to recovery would be an important metric to assess the health of the banking system in the near term.

 

Accumulated interest on WC to get converted into term loan – positive for borrowers

Further, in order to ease the difficulties faced by borrowers due to the disruption caused by COVID-19, the RBI has asked all lenders to convert the accumulated interest of six months on working capital loans into a Funded Interest Term Loan, which is to be fully repaid by Mar’21. This comes as a big relief to borrowers, who otherwise would have been required to make balloon payment, thus, causing financial distress.

 

RBI cuts repo rate by 40bp to 4%; monetary easing to further drive reduction in lending rates

In its first monetary policy meeting of FY21, the RBI cut the policy rate by 40bp to 4.0% to manage the current dismal economic situation. Accordingly, the reverse repo now stands at 3.35%, against the earlier rate of 3.75%. The continued monetary easing would drive further reduction in lending yields under the external benchmark and a decline in the 1-year MCLR rates (20-50bp reduction since Jan’20) while banks have also been sharply cutting the retail and bulk deposit rates over the last few months (large banks have reduced TD rates by up to 150bp) to offset margin pressure. Overall, we believe that large banks with strong/granular liability franchise would be able to tackle the margin pressure v/s their mid-sized peers.

 

Other measures

The RBI also announced certain other measures such as:

* Increasing the group exposure limit of banks from existing 25% to 30% of eligible capital base. This is likely to help borrowers that are unable to access capital markets in these uncertain times and would facilitate the flow of resources.

* Further, SIDBI’s Special Refinance Facility of INR150b has been extended at the RBI’s policy repo rate for a period of 90 days to provide greater flexibility in operations. However, this is not expected to result in much refinancing to NBFCs as the sector comprised less than 10% of SIDBI’s outstanding loans as at FY19.

 

View

We believe that the extension of the moratorium is a step in the right direction as economic activity is still in a nascent stage of recovery and borrowers would need more time to recuperate from the COVID-19 crisis. However, banks need to work actively with borrowers and ensure that moratorium gets availed in deserving cases, and at the same time, prevent any moral hazard. The trend in collection efficiency should become an important barometer of banking health as book under moratorium may remain elevated over the next few months. Further, many banks had indicated that several borrowers are cautious and opting for moratorium to preserve liquidity. Thus, it would be interesting to watch how these customers react to Moratorium 2.0 as it would coincide with economic activity picking up. We prefer large private banks as they have strong coverage, contingent provisions and robust PPoP to provide for potential credit losses. Our top picks are HDFCB and ICICIBC.

 

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