Number of willful defaulters rose before coronavirus lockdown: Analysis

Nationwide lockdown to contain the pandemic may force more business to default on loans, say analysts

India’s number of willful defaulters — an entity or a person that has does not pay back a loan despite the ability to repay it —increased before the country was locked down for almost two months late March to contain the spread of the coronavirus pandemic, data shows.

Lenders filed 1,251 cases to recover Rs 24,765.5 crore, said an analysis of March quarter data by TransUnion Cibil, which maintains data on cases filed against willful defaulters. The numbers are released with a lag and not all lenders update with the same frequency. The analysis considered 15 lenders, which saw an increase in the number and value of outstanding willful defaulter loans. Defaulters above Rs one crore was considered for this analysis.

Experts said defaults might increase as the economic stress caused by the pandemic deepens. The lockdown caused all economic activity to come to a halt, affecting businesses and their ability to pay back loans to banks.

The lockdown meant that the National Company Law Tribunal’s (NCLT) hearings on businesses facing liquidation of assets were affected. This may well create a situation which emboldens defaulters, said Anand Tandon, an independent market analyst.

“There was some fear of NCLT, now you have put that in abeyance,” he said.

“It should be worse,” said a lawyer who has handled cases at NCLT and who was referring to numbers in financial quarters ahead.

Public sector banks accounted for around 82 per cent of the total increase in willful defaulter amounts.

IT catches Covid-19 bug: Sector's outlook takes a hit on demand concerns

Analysts expect top line pressure to reflect from Q4 itself.

Information Technology (IT) stocks, which were considered as ‘defensive’ until recently, have been under heavy pressure due to demand concerns caused by the outbreak.

The Nifty IT index has shed close to 20 per cent in a month, in line with the Nifty50. The expected earnings pressure, mainly on account of a tepid top line, is weighing on sentiment.

Analysts expect top line pressure to start reflecting from the March quarter itself, given the supply-side disruption amid the lockdown and business disruption in key markets such as the US and Europe. Besides lower billing and utilisation (lower productivity on account of travel restrictions), the disruption will also hit margins, despite a sharp depreciation in the rupee.

The major impact will be felt in H1FY21 (April-September 2020), with demand from clients expected to be sluggish. This will hurt earnings visibility for the entire FY21, given the first half is typically vital for the sector. This is when most of their clients announce their IT budgets.

Therefore, analysts at HDFC Securities have slashed their earnings estimates by up to 12 per cent for top IT players, and by a sharper (up to 28 per cent) magnitude for mid and small IT companies.

According to Sanjeev Hota, head (research) at Sharekhan: “The rapid spread of the virus has caused disruption in the supply side, and is likely to impact demand in the near term, driven by the cut in discretionary spending by clients, lower billing, and pricing pressure.”

This will impact IT firms’ financial services segment (mainly on account of lower global interest rates) and the retail sector, and consequently take a toll on overall revenue growth, as these two segments contribute 30-45 per cent to revenues of most players. Other analysts expect no growth in 2020-21 (FY21).