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.

Battery firms better placed as medium-term outlook looks attractive

Replacement demand, lower lead costs are positives for Exide and Amara Raja.

Stocks of battery makers Exide Industries and Amara Raja Batteries were in the green, even as the benchmarks and the peer index BSE Auto index were down between 1.5 per cent and 4 per cent. The gains for the two were on expectations that replacement demand will bounce back after the lockdown comes to an end, steep fall in lead prices, and inexpensive valuations.

An analyst at a domestic brokerage believes that battery players are placed better among auto component segments, given the replacement demand cycles for batteries. The replacement segment accounts for about 40 per cent of revenues and more than half of their operating profit.

Citing the example of global financial crisis of 2008-09, analysts at Kotak Institutional Equities highlight that gross revenues of Amara Raja and Exide Industries grew 17 per cent YoY in FY09 and 7 per cent YoY in FY10, mainly led by a strong auto replacement segment demand. Further, currently, given their strong balance sheets, the two firms (largely a duopoly) are expected to benefit by gaining market shares from unorganised players.

The other trigger for the sector is the high possibility of battery makers maintaining margins given their ability to retain most of the gains from the fall in raw material prices. Prices of lead, which accounts for 60 per cent of raw material costs of battery makers, are down 11 per cent since February. Analysts say while there will be a hit on the top line, even if some of the gains are passed on by the companies, they will have a cushion on the margin front, especially in the replacement and industrial segments.

Finally, the 35-39 per cent correction in both stocks since their highs this year has led brokerages upgrading the two stocks. Analysts at ICICI Securities, however, prefer Exide Industries given the debt-free nature of its balance sheet, steady cash flow from operations, free cash flow yields of 5 per cent, and healthy return ratios of over 25 per cent.

While the near term could see some pressure because of weak demand from automakers, the medium-term outlook for the battery makers looks attractive.

Delay in regulatory leeway likely to prove costly affair for banks

With loan growth and asset quality likely to take a hit, FY21 earnings estimates are coming under the knife.

The sharp rally in banking stocks, which rose 10-12 per cent, in the first half of Thursday’s trade did not sustain fully as hopes of relief or bailout measures for the sector from the finance minister did not materialise. The minister though has kept the option open for more relief measures as and when needed, which suggests that some relaxation (from the Reserve Bank of India or RBI) on asset classification norms (critical for classification of non-performing assets or NPA) may come through for the sector. While hopes of some relief have been around for over 10 days, any further delay could prove costly for banks.

Analysts are already downgrading their earnings expectations, with private banks likely to see a sharper cut. In fact, an across-the-board earnings downgrade is also the first of its kind for private banks.

The nation-wide lockdown, which was initially to be more a problem for small and medium enterprises (SME) exposure of banks, is beginning to spread. “The current pan-Indian lockdown will certainly affect cash flows of borrowers, both individual and corporate, which may lead to an increase in corporate as well as retail NPAs,” say analysts at ICICI Securities. “The lockdown will adversely impact most sectors and may not be restricted to chemicals, textiles, electronics, and entertainment,” they add.

The last time when banks received dispensation on asset recognition was in 2016, after demonetisation. The RBI gave a 90-day window for classifying certain retail loans as NPAs.

“Without a similar dispensation being extended from the March quarter, banks could find it very difficult to sail though,” said a top executive of a state-run bank. Another senior banker said unless such dispensations are soon given, it may be difficult, especially for private banks, to lend support to customers. While most state-owned banks have come out with special schemes for their customers battling the lockdown, private banks are yet to act. “The longer it takes to roll out these relief measures, the prolonged will be the period of dull growth for banks,” he adds while mentioning that business volumes have been quite negligible in the last two weeks.