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India’s Mortgage Sector affected by the Stress Waves Riding among the Small Business Owners

According to the latest bank data, COVID-19 has not just affected small businesses but has spread its stress waves across different sectors of the economy. These stress waves have resulted in the manifestation of rising loan defaults across retail segments. Even the most resilient sectors of the economy, like Housing, have also witnessed defaults with customer repayments.

Despite a push from the government for fresh loans to small businesses, the June quarter financial results from the banks indicated default by small businesses on existing obligations. All the small business owners who defaulted on loans witnessed their loans getting classified as bad as per the banks.

Impact of June Quarter Report on SBI

In the June quarter report, India's largest lender of home loans to non-salaried borrowers, the State Bank of India, also saw a deterioration in their mortgage asset quality. The mortgage portfolio of SBI as of June 30th stood at 5.05 trillion Rupees with a basis point sequential rise (bps) of 59 in bad loans.

On August 4th, SBI Chairman Dinesh Khara told reporters, "Many of the SME borrowers also would be the ones to avail of home loans. I think the essential stress seen in this book is a disruption in cash flows for SMEs. Our home loans are to first-time buyers. So, there will be all efforts and endeavour on their part to honour their obligations.”

Apart from SBI, many other banks have witnessed a deterioration in the mortgage asset quality, like Punjab National Bank (PNB) and Bank of Baroda (BoB). As of June 30th, the non-performing classified micro, small, and medium enterprise (MSME) loans stood at 23.23% for Punjab National Bank and 16.7% for Bank of Baroda.

The Chief Executive of Punjab National Bank, S.S. Mallikarjuna Rao, claimed, "In the case of MSMEs, (a) little stress is still there, and we expect the improvement only by March 2022 in respect to up-gradation of the accounts. As far as slippage is concerned, it has almost reached the maximum. I do not expect any further slippages in the next few quarters in a big number from MSME."

Restructuring Scheme by SBI

The Central Bank opened a window for Small businesses as they had been suffering since 2018, but the COVID 19 pandemic aggravated their situation. Despite government-guaranteed loans or the Emergency Credit Line Guarantee Scheme (ECLGS) and the debt recast by the central bank, the stress remains prevalent in this segment. The Reserve Bank of India's (RBI) guideline states the loans under the June quarter were not eligible for any restructuring. State Bank of India claims a positive response to their restructuring scheme, with over 7,300 Crore Rupees of recast requests under their second phase and around 1,400 Crore Rupees from Small Businesses.

Deputy Governor of RBI M.K. Jain explains that the RBI is aware of the stress in MSMEs and retail loans but is yet not alarmed. The RBI remains constantly engaged with regulated entities like outlier banks and Non-Banking Financial Companies (NBFC) and conducts regulated stress tests.   


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