'Moratorium Extension Will Determine Economic Recovery in India'

Christopher Wood, global head (equity strategy) at Jefferies Financial Group, suggests that moratorium could trigger a consumer lending non-performing loans cycle.

New Delhi: The decision on whether to extend the moratorium on loans till December 2020-end will be a crucial factor in determining the pace of recovery for the economy, banks and the real estate market in India, wrote Christopher Wood, global head (equity strategy) at Jefferies Financial Group, in GREED & fear — his weekly note to investors.

“A critical question for the banks, the property market and indeed the economy is now whether the moratorium is extended yet again. Still until proven otherwise, investors should probably assume that the moratorium will be extended for another four months to the end of the calendar year,” Wood said.

Still a negative from the government’s standpoint, Wood believes, is that such a restructuring would be outside the recently established bankruptcy process, though presumably the special circumstances of COVID-19 could be used to justify the move.

Earlier this year, the Reserve Bank of India (RBI) had allowed banks and financial institutions to offer a moratorium of three months on payment of instalments on all term loans, which was subsequently extended by another three months till August-end.

Wood believes moratoriums are hard to end and forbearance is forced on the banking sector, which (including NBFCs) still accounts for 19% of the MSCI India index, though down from a peak of 27% in December 2019. A moratorium, he suggests, could trigger a consumer lending non-performing loans (NPL) cycle.

“It is interesting that Indian banks have taken advantage of the recent stock market rally to announce capital raising, with $13 billion of equity raising by private sector banks and NBFCs now in the pipeline. GREED & fear would interpret this planned capital raising as primarily defensive in nature,” Wood wrote.

Real estate market

The lockdown, according to Wood, has dealt yet another body blow to the Indian residential property market where he now sees potential for forced selling of property portfolios of the stressed developers, most particularly if the moratorium is not extended beyond August.

“For now, the moratorium means that the price discovery process has stalled, particularly in the high-end residential market and in commercial property. A property consultant hosted by Jefferies’ Indian office this month estimated that such forced sales could lead to a 30% write-down in values on loans extended to the stressed developers,” he wrote.

Growth forecast

Regarding economic recovery, Jefferies expects real gross domestic product (GDP) to contract 5% this fiscal year. Those at Nomura, too, share a similar view and expect the GDP growth to remain in negative territory for the next three quarters (-5.6% in Q3CY20, -2.8% in Q4CY20 and -1.4% in Q1-2021), averaging -5% y-o-y in 2020 and -6.1% in FY21.

Analysts at HSBC, however, caution that the GDP releases under COVID-19 pandemic do not fully capture the state of the economy. India, HSBC said, runs an informal sector survey every five years and revises past GDP growth data accordingly and the last such survey was conducted before demonetisation.

“As such the GDP numbers since demonetisation do not capture the true state of the informal economy. This time around too, GDP releases may not fully capture the weakness in economic activity, until it is updated with a new informal sector survey a few years down the line,” wrote Pranjul Bhandari, chief India economist at HSBC in a co-authored July 23 note with Aayushi Chaudhary and Priya Mehrishi.

By arrangement with Business Standard.