In a country like India, where many entrepreneurs are emerging every day and setting up new businesses every day, the need for loans is increasing. Loans consistently help people start their businesses easily, without compromise. However, like anything else, the pandemic also destroyed the conditions of the banks. The number of bad loans is on the rise and poses a major threat to the country. We will discuss all about it in this article. To understand everything at the base, we have to start from scratch. We assure you that by the end of this article we will be fully aware of the current problem.
To begin with, do you need to know why loans are important to a country?
The basic principle of borrowing and lending leads to the development of the country. This is essential for the country because the lending of money leads to more and more investment spending and infrastructure development and therefore the economy benefits. In addition, the government uses loans, in particular to control the inflation or deflation situation in the country. But the dominant problem of bad loans poses a threat to the economy and risks hampering its growth.
What is bad credit?
A bad debt, or as we say a bad debt, is an amount given by a bank to a creditor that is no longer likely to be repaid for various reasons. This directly acts as a loss for the bank that they have to pay on their own, thus creating a big problem for them. Recently, the number of bad debts in the country has been steadily increasing, mainly due to the pandemic. During the pandemic, the whole country was closed and there was no economic activity. The businesses were closed and there was no source of income, each relying only on their past savings. As a result, people who took out loans found it very difficult to repay the loans.
According to the RBI report, the number of bad debts would increase to 9.8% among Indian lenders. Blame the virus, the number would reach this level by the end of this fiscal year and could increase further if the Covid-19 virus is not contained. According to the RBI Financial Stability Report, it has been revealed that the second wave of the virus will negatively impact the income outlook of individuals and therefore the level of bad debts may increase.
The second wave of the COVID-19 virus has worsened the asset quality indicators of nonbank financial institutions with HDB financial services. HDFC banks said they saw their bad debt triple in one year. In a report, the bank said its non-bank lender had a gross non-performing asset ratio of 7.5% at the end of June last year. It was only 2.86% at this time of the previous year. Doubling bad debts in just a quarter shows how badly the COVID-19 virus is affecting the country. The GNPA ratio was at its lowest of 3.89% in March 2021.
The main reason for the decline is the customer segment HDB serves. HDB is aimed at the customer segment that is a notch or two below, and the segment has been severely affected by the pandemic, mainly due to constraints on the supply side. Moreover, research by HDFC bank officials claimed that the customer’s death toll is 4-5 times higher than normal levels, which is extremely unfortunate for the country. However, this is a temporary phenomenon and it will surely recover when conditions return to normal and reduce the number of failures which is currently very high.
Speaking about its monetization plan, officials at HDB Financial said they are not looking to monetize it in the near future until the situation improves. Monetizing it during this time would certainly not benefit them as it could lead to further losses.
What bad loan made to a bank?
Bad credit is a direct loss for the bank. The amount given to the borrower becomes zero in the sense that it cannot be repaid by these borrowers. Bad debts reduce the profitability of banks and also reduce their ability to extend more credit. The reduction in the availability of credit has a direct impact on the country, as it hampers the country’s future infrastructure prospects. In addition, bad loans risk hampering the country’s economic growth through less investment from the general public and thus lead to greater uncertainty in the country’s banking sector. It also reduces the confidence of the general public in the country’s banks. This further reduces the country’s financial stability.
At the individual level, the growing number of bad debts has the potential to destroy businesses, reducing cash flow levels. In a dynamic country like India, where new investments are made almost daily at huge levels, the availability of loans becomes a necessity. The increase in bad debts therefore leads to the failure of new investment prospects. However, as the virus controls everything, the future becomes unpredictable. The current situation could worsen if the virus remains as deadly as it would lead to a decline in economic activity and subsequent lockdowns, making more people vulnerable to bad debts.
HBD Financial Services also saw a sharp drop in net profit of nearly 44% to Rs 13.6 crore in the first quarter of this fiscal year alone. The profit level was Rs 232.7 crore at this time of the previous year. The non-bank lender also has a liquidity coverage ratio, which stands at a good level of 24.2%. Finally, the overall solvency ratio stands at 19.8% with a Tier I solvency ratio of 14.9%.
Edited by Aishwarya Ingle