Most states in the country have now clamped partial lockdown or put in place other restrictions because of the unabated spread of COVID infections. This is now beginning to affect businesses, particularly in the services sector. If such a scenario persists it will certainly lead to loan defaults as the repayment capacity of the borrowers would take a hit. Will the Reserve Bank of India (RBI), in such a case, be forced to come up with another round of loan moratorium for the hapless borrowers?

Well, it can be said that though one can detect nervousness in the bankers, situation is not as bleak as it was the last time. Last year, when the lockdown was announced the banks had faced major pressure on their asset quality and fresh business acquisition. However, the actual impact on asset quality wasn’t much because of the timely intervention of the central bank to avert an immediate shock.

This year, however, any major impact on the asset quality is not likely for bigger banks as they have already addressed much of the corporate bad loans. Moreover, the second wave of the lockdowns is more calibrated. It is therefore certain that the effect on the asset quality would not be big. Experts believe that demand collapse would not be as strong this time. Neither would the services sector this time be as seriously affected.    

However, smaller firms or microlenders might have to bear the brunt of the COVID second wave which is likely to affect the livelihoods and collections. Microlenders, as is evident from the name, give small loans to low-income borrowers. They borrow from banks and lend to borrowers at a margin of 10-12 per cent over their borrowing costs.

As per a recent report from the rating agency, Crisil, Maharashtra is amongst the 5 leading states when it comes to microfinance loans, with assets under management (AUM) of around Rs 16,700 crore as of December 2020. This is equivalent to almost 7 per cent of all microfinance loans.

It would be worth recounting here that non-banking finance company microfinanciers (NBFC-MFIs) account for 40 per cent, or around Rs 6,700 crore, of this pie. Crisil has made it clear that collection in Maharashtra has been slower and lower hovering around 85-90 per cent even before the latest restrictions because of earlier lockdowns while the countrywide average collection efficiency was 90-94 per cent in December 2020.

Banks are quietly observing how states fare. However, there is no panic as was the case last year as bigger banks have taken adequate measures. Moreover, the demand collapse would not be severe this time neither would the services sector face such stiff challenge. Smaller firms might suffer but the situation is not believed to be as challenging as was the case last year.

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