Indian Banks Headed for ₹20-Trillion Hole

A news report by the LiveMint has suggested that due to the Coronavirus Pandemic, Indian banks are headed for a ₹20-trillion hole.

Here is an excerpt from the LiveMint:

Unlike many central bank governors who have tried hard to stay tight-lipped during the pandemic, Shaktikanta Das, the governor of the Reserve Bank of India (RBI), did not beat around the bush in his latest speech. At a banking conclave last weekend, he said: “The economic impact of the pandemic… may result in higher non-performing assets (NPAs) and capital erosion of banks. A recapitalization plan for public sector banks (PSBs) and private banks has, therefore, become necessary.”

In simple English, what Das said was that the negative economic impact of covid-19 will lead to increased defaults by borrowers. How bad is it going to get? If one-twentieth of the loans which are likely to be under a moratorium as of 31 August are defaulted on, the overall quantum of bad loans in the Indian banking system would be close to ₹12 trillion. If one-fifth of them default once the moratorium is lifted, the quantum of bad loans would touch a dizzying ₹20 trillion, more than double the current level.

These are extremely conservative estimates, of course. Not surprisingly, former RBI governor Raghuram Rajan said recently: “The levels of NPA will be unprecedented six months from now.”

With increased defaults, banks will need to be recapitalized, that is, more money will have to be invested in them to keep them going. In fact, there is already enough evidence of increased pressure in the banking system in the days ahead and of the impending storm.

Read the rest: Live Mint

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