The recent third phase of monetary measures gives loan deferral for all sectors to June 2022. This is an important relief measure for an economy hit by COVID-19.
The banks initially wanted to give relief to only certain affected sectors like hotels, manufacturing etc but the government led by the Prime Minister requested for a blanket deferral for another year.
The banks complied and now it is important that both the government and the Central Bank keep a close eye on the health of the banks.
A worrying development is a large number of savings deposits growing rapidly in banks, but banks not being able to lend them out due to very low demand for credit.
It is an irony that a large chunk of these deposits are from people who do not have to pay loans due to the deferral which is a double whammy for the banks.
This will affect the revenue and profitability of the banks for the foreseeable future.
Another worrying sign is that very few people have opted to take the one percent loan interest rate reduction for paying the loans regularly.
This will also impact the bottom lines of the banks.
Adding to the above banking woes is a sizeable pre-COVID-19 Non Performing Loans.
The fear is that if nothing is done to tackle them now then once the deferral ends NPLs could go through the roof.
The Central Bank is working on some protocols to allow auction of seized property so that banks can recover some NPL, but this will take time. It may be a bit too late for 2021 and with all the above factors banks are expected to take a massive hit to the bottom line this year too.
On the other hand, the available of excess liquidity or cash and the lack of pressure to pay loans has led to big rush for property leading to record high land prices.
Ironically, banks cannot gain from this property price boom as the Central Bank has forbidden auctions.
The condition of the banks is closely linked to the economy as the lack of economic activities and investment avenues mean that people will save up, and there is less demand for credit.
However, while banks must take their share of the COVID-19 load, the Central Bank and the government must ensure that the banks themselves do not become sick or too weak.
They must allow the pressure to release in certain areas. One thing is to give a clear signal on the recovery of pre-COVID-19 NPLs so that they don’t become a burden in the future.
Another is encouraging those who can afford to pay loans to pay up instead of using the money for speculative investments.
Finally, the Central Bank must soon allow the auction of seized properties so that banks can recover some of their revenue and there is some revenue inflow to keep the banks healthy.
The job of the Central Bank is to worry.