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Bankers/IBA press meet - High on hopes, low on delivery; no big announcement except modification to extant ECLGS/Restructuring

Although some big-ticket announcements - especially relating to new Covid relief measures and Bad Bank formation - were expected at the press meet of Bankers/IBA on Sunday, the measures announced were limited to an extension / modification / addition to existing ECLGS/Restructuring schemes and some procedural clarity.

In our view, these can have potentially limited incremental positive impact on growth/asset quality of banks that are reeling under the second Covid wave. Banks have already sanctioned /disbursed Rs2.54trn/Rs2.45trn under the ECLGS scheme, leaving limited room for additional credit support unless the overall limit (current: Rs3trn) is extended once that is achieved.

Key announcements

* ECLGS 1.0: Additional ECLGS assistance of up to 10% of the o/s standard exposure as of Feb 29, 2020, over & above already granted 20% in Phase 1. The repayment structure has also been extended from earlier Interest (1-year) and Principal + Interest (3-year) to Interest (2-year) and Principal + Interest (4-year) – in line with the RBI announcement. We believe further 10% credit facility can potentially lead to an additional credit of ~Rs1,000bn (based on our rough estimate subject to 10% being calculated on o/s eligible exposure as of Feb 29, 2020) and take out the risk of relapse from this pool for at least 2 years. However, the limited balance sanctioning window of Rs0.46trn could limit incremental sanctioning.

* ECLGS 3.0: Maximum corporate borrower eligibility ceiling of Rs5bn is removed, subject to maximum facility under ECLGS of 40% of existing exposure, or Rs2bn, whichever is lower. Apart from Hospitality, Travel & Tourism, Leisure & sporting sector, Civil Aviation has also been added. In our view, disbursements under this scheme has been relatively moderate, and thus the inclusion of Civil Aviation should help boost credit under the scheme to impacted airlines and ancillary support businesses.

* New ECLGS 4.0: 100% guarantee cover up to Rs0.2bn to hospitals/nursing homes/clinics/medical colleges for setting up on-site oxygen generation plants at a concessional interest rate of 7.5%.

* Validity of the ECGLS scheme has been extended till Sept 30, 2021 (from June 30) and disbursements are allowed till Dec 31, 2021. However, the overall ECLGS limit of Rs3trn remains unchanged, leaving the balance sanctioning window at ~Rs0.46trn.

* Under the Covid loan scheme announced by the RBI with additional liquidity support at concessional rate, PSBs have designed 3 products for Vaccine manufacturers & importers, hospitals/dispensaries, path-labs, manufacturers & suppliers of oxygen, ventilators, Covid drug suppliers, and individual patients for treatment (max. Rs0.5mn).

* The RBI had recently announced that under Resolution Framework 2.0, Individual, SBL and MSME standard (till March 31, 2021) borrowers with exposure of up to Rs250mn, who have not taken restructuring earlier, will be considered for fresh restructuring till Sept 30, 2021. Those who had availed restructuring/resolution 1.0 can also have their residual tenure extended up to 2 years. The press meet focused more on detailing their schemes, process flow and modalities.

Our view:

We believe that the potential economic impact of second Covid wave, which is already on a receding path, is likely to be limited, and thus the fiscal/regulatory response has been measured till now. However, collection efficiencies have been impacted in urban/rural areas and this was also admitted by bankers in the press meet - more so in the month of May. So we expect the RBI to soon announce some additional relief measures for the financial sector, including forbearance on NPA recognition (30-90 days) for select sectors/customer segments.

In our view, the data on SMA pool/collection efficiencies will be key monitorable in Q1FY22 and the actual impact on asset quality will only emerge in Q2 and beyond. Our top picks in the banking space are ICICI, SBI, IndusInd, Federal and Equitas SFB, as these banks are likely to see limited growth/asset quality impact from second wave and also carry reasonable capital/provisioning buffers.

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