Extension of loan moratorium won’t solve banks’ problem: Ajay Srivastava

Most good quality banks and institutions will have to take a provision in advance of the loan becoming bad, says the CEO of Dimensions Corporate Finance Services.

Why has the Bank Nifty fallen so much? RBI has cut rates and has given an extension. If I look at the fine print, it clearly means that all the NPAs now will not come out this year and they will come out next year. So should not banks and banking stocks be breathing a sigh of relief?
One of the issues has been that we have been expecting that for the seriously affected sectors like real estate, hotels, airlines and other hospitality or a large number of sectors, there would have been a forbearance clause to restructure the loans. What has happened is three more months of moratorium and then you pay up the interest and principle by March 31, which is around the corner. So if you look at it, it is a very short-term postponement of a debt problem which the RBI has done. The articulation of the problem was very good by the RBI but the solution was nothing because the banking system would be awash with loans which have overdues coming up in September, October, November, December. They will become overdues now. What you have covered is three more months and that is fine but what about the rest of the year? This piecemeal cannot work because the lenders cannot go out to raise money.

If you do a restructuring let us say of real estate or hospitality or an airline; for a three-year restructuring or a two-year restructuring of loans, they can go out and borrow more money or raise capital on a clear idea that they will be solvent. Now they cannot raise equity because you do not know about the solvency of those companies and the bank will have a restructuring problem sitting on their head. Where there is no forbearance, they will have to provide for NPAs. So this three-month fine tweaking is good; I am not cribbing against it. But that is not what is going to solve the problem. The banks’ problem is huge today and the RBI has ignored that entire problem and moved ahead with the minor tweaking of just three months and pay by March 31; nobody can pay by March 31. You cannot pay. Look at the cash flows. When the economy comes together, when they start earning money, when we will pay our old workers, when we will pay suppliers, then the bank dues can be paid. So I think it was just too less and too much show for that and it is the same story. They are not recognising the problem although he started by articulating it beautifully but he just left it.

The Bank Nifty is not at 25,000, it is at 17,000. Most of these corporate banks have fallen 50% from their highs. SBI is at a 52-week low and Bajaj Finance is off 50%. I completely endorse what you are saying that the government has started the lockdown, they need to bailout; why should the private sectors be bailing themselves out again and again because it was not their decision to shut down the economic activity? But how much of this is in the price because you and I both know that it is not about reacting to the news; it is about trying to figure out what is in the news?
No, I do not think it is in the price because you and I both agree that the 52-week high of most stocks whether Bajaj Finance at Rs 5,000 or HDFC Bank at Rs 1,300 were overpriced by a margin even before the Covid struck us. In the month of February itself we were all convinced that these financial stocks were way off in terms of valuation. So partly the correction has been the froth in the system. Now what happens to the prospects of these banks at the end of the day? New activity is almost zero; so new funding will not happen. The old ones will have a problem because there is no restructuring forbearance and three, most good quality banks and institutions have to take a provision in advance of the loan becoming bad.