The Indian banking system is likely to see a spike in asset quality deterioration as a result of ongoing economic disruption.
RBI's recent Targeted Long Term Repo Operation (TLTRO) 2.0 of Rs 25,000 crore also met with a tepid response as bankers remained unwilling to infuse fresh liquidity despite the cut in repo rates as well as relaxation in provisioning norms.
A historical study reveals that regulatory interventions have always been followed by higher gross non-performing loans (GNPLs). After the farm loan waiver in 2008-09, agriculture GNPLs rose from 10.5% in March 2010 to 18% in March 2012. Portfolios at risk for 90 days also increased sharply for microfinance companies (MFIs) after regulatory interventions in 2010 and 2016.
Surplus liquidity with the banking system is set to surge to 8-9 trillion rupees by July. However, banks are not showing any willingness to start lending given the shaky business environment.
Learning from past incidents, banks are unwilling to take a risk of a rise in bad assets. As a result, commercial vehicle (CV) loans, unsecured retail loans, MFIs and SME loans are most likely to come under further pressure.
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