Cash and Carry: A healthy retail sector can help mitigate the NPA crisis

Two crises together are threatening to derail the Indian economic prowess. The first one relates to a supply-side issue—the ticking of the NPA bomb in our banks. As with many of the core sectors, the Indian banking segment is trying hard to make the best of a very trying situation. All banks, particularly the public sector ones, are having to face a liquidity crunch and mounting MPA pressures to boot. In fact, according to reports, the top 17 banks in India have NPAs totaling about Rs 7 lakh crore by the end of December 2020. This does not include the upwards of Rs 1 lakh crore of ‘hidden’ NPAs which have arisen due to the moratorium shield by the RBI in the wake of the COVID pandemic. With the lifting of loan moratorium, closure of restructuring window, and the resultant end to asset quality standstill—the measures that enabled banks to hold back from declaring their real NPA status and allowed them to continue with the same no-loaded provisioning as before—a severe impact on asset quality is imminent.

The second crisis relates to the demand side. The Indian retail sector is a huge contributor to the Indian economy and contributes more than 10 percent to its GDP and eight percent to its employment. At a trillion dollars in revenue, with around 11 percent CAGR projected for now and the next five years, considerable investment is forecast to be needed for sustaining this frenetic growth pace. However, what with the pandemic impact and the changes in consumption patterns of consumers as well as a few policy changes, there is a challenge of funds and earnings for many a retail player. In the organized space, where big-ticket investments are rife, a loss of earnings has caused deterioration of the creditworthiness of borrowers, and repayment schedules have frayed. Banks, who were up till now lending at low risk, now face a bitter present and a bleak future.

India’s ‘Twin Balance Sheet problem’, where both the banking sector (that gives loans) and the corporate sector (that takes and has to repay these loans) are stressed. The NPA challenge and the retail industry fiscal crisis are intertwining to fast resemble the makings of a Gordian knot. Or worse. On the one hand, banks need revenue that accrues through instruments such as retail loans and advances in many cases. On the other, the retail sector can only grow if advances are available to enable their expansion and diversification, in addition to maintaining opex and capex considerations. The complex and tragic situation today has made both the lender and the borrower wary of each other. The net offshoot of this entire devilish waltz is the darkening of the economic horizon and an exacerbation of troubles for all involved.

In terms of challenges, one of the key objectives for the current fiscal for banks would be tackling NPAs—both visible and latent. With the various circulars from the Reserve Bank of India, the bankruptcy law, the Sarfaesi (The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, banks have been adequately empowered. Recovery and disbursement could start with a better strategy in place and the road ahead may be a bit less intractable. On the other hand, the market—read the retail industry or the shopping complexes or malls and omni-retail channels—must also be given an enabling atmosphere. While the market forces will surely create a catchment for recovery in time, there needs to be an awareness about non-market, extraneous forces as well. these proceedings are causing deep damage to the viability of the retail industry and further straining an already stressed borrower constituency.

An example of the erosion of the industry’s ability to survive is the choking off of revenue streams. The total outstanding to banks by Future Group, for instance, is pegged at around Rs 13,000 crore. Not a small amount.?According to news reports and industry knowledge, Reliance and Future group had decided to merge, and all businesses and debt of Future group were to be acquired by Reliance. As part of the arrangement, banks were to get all their dues back without any haircut. This deal meant that banks would be able to limit their NPAs to a point. Unfortunately, an external third party, the e-US commerce giant Amazon, is trying to scuttle the deal for reasons best known to it. Similarly, The?Shopping Centre Association of India?(SCAI) believes that banks’ repayment demands are expected to put the shopping centers industry in great financial distress, impact more than 50 percent of malls across the country and lead to loss of lakhs of jobs.

There are signs afoot of a turnaround. Retailers are hopeful that these few months should see a good recovery. With the retail sector forming one of the true growth engines driving India’s market economy forward, its health and welfare imply too the welfare and strength of the nation’s commercial and economic institutions. It should be remembered that public sector banks with huge NPAs eventually need the government which has to shell out huge funds from the exchequer to recapitalize them. This burden on the exchequer is a burden on the country’s citizens and taxpayers. In the final analysis when industry slows down, so do the banks and then ultimately the composite economy. Drying up of funds smashes the risk-taking capacity and stills entrepreneurship. Nothing that seeks to solve our NPA issues should be allowed to continue, that is of the utmost necessity.