The Kerala floods could materially affect the unsecured lending (microfinance institutions), SME businesses and the state’s agriculture output, resulting in higher loan slippages and insurance claims, says India Ratings and Research (Ind-Ra). While Kerala has 14 districts and the coastal districts have been relatively unaffected with the recent event, eight districts comprising 56% of state population have suffered major losses. Kerala is the 10th largest state in terms of overall bank credit, and its share in the total bank credit was 3.2% and in deposit was 3.8% in FY18. Meanwhile, the large share of Kerala in overall inward remittances (19% of overall remittances) would help leverage the rebuilding of state infrastructure.
Ind-Ra believes while delinquencies would shoot up across below-mentioned segments in the short term, actual haircuts are likely to vary depending on asset classes. Additionally, as the state gets back to normalcy, some of the segments could see a sharp spike in credit demand.
Many regional commercial banks would be affected due to their legacy state exposure towards SME and agri, where loan slippages could materially increase till the borrowers’ cash flows normalise. Large regional banks such as The Federal Bank Ltd (debt rated at IND AA/Stable) and The South Indian Bank Limited (IND A+/Stable) could witness an immediate increase of 20%-25% in gross NPL. Gold financiers would particularly be impacted and could see higher auctioning post moratorium as their borrowers largely depend on agricultural activities for servicing loans. However, lending against gold is likely to witness higher growth in the near term where demand would flow in for a higher ticket size category, largely where customers would borrow for a short term for refurbishment.
Microfinance Institutions’ exposure to the state stood around INR21 billion with PAR30 at 2.7% in FY18. Post this event, there could be a spike in PAR30 number for the eight players operating in Kerala geography, where portfolio behaviour would remain vulnerable, largely due to the loss of livelihood for many borrowers in the affected districts.
Federal Bank and South Indian Bank have sufficient profitability buffers to absorb incremental credit cost arising from this event. Gold financiers rated by Ind-Ra have exposure to tune of 25% of advances to the state; these companies however have strong capital buffers to cushion the credit impact. Microfinance players would face a higher impact and Ind-Ra will decide on any rating action based on the expected impact on profitability and capital buffers.
Ind-Ra estimates key businesses in SME sectors would be moderately affected. Cashew (Kollam belt), rubber (can see temporary production loss) and marine (Allepey belt) have not faced a major damage by being located in the coastal belt.
General insurance companies would also bear the brunt by having high exposure through motor own damage policies, property and crop insurance policies, leading to elevated claim ratios. Ind-Ra estimates there could be a claim impact of INR10 billion, most of which could be covered under reinsurance & catastrophe covers. However, this would also lead to incremental higher growth for many general insurance companies post normalisation where the need for a cover against future catastrophes would increase with personal awareness.
The credit demand is estimated to increase up to INR113 billion in FY19 with over 45% of the Kerala population affected (i.e. 80% of people in the affected areas). This comprises around 0.30 million households (50% credit need funded through formal lending channels) with per household credit demand of nearly INR0.075 million. Kerala witnessed an incremental credit demand of around INR351 billion through banks in FY18, i.e. 14% yoy growth in bank credit. With the devastation, incremental credit demand can grow in the range of 1.25x-1.5x, factoring in the slowdown in capex and more of refurbishment lending. However, incremental lending would be far more selective, with credit availability getting restricted to better rated borrowers.
The credit demand could increase largely in personal loan, two-wheeler financing, contractor funding, large-ticket gold loan and housing segment of retail loans. Non-banking finance companies could witness higher growth, catering largely to informal business and self-employed segment, with consumer finance being the major demand driver. The share of other personal loans in Kerala’s bank credit, which stood at 8.1% in December 2017, can rise up to 9% in FY19, as evident through the behaviour during Tamil Nadu floods. Other personal loans would be largely loans against deposits and Kerala has a rich deposit source which can be levered for rebuilding.
Any forbearance as provided under the Reserve Bank of India’s guidelines for natural calamity would delay the recognition of the delinquency, which may increase the ultimate credit costs for banks and NBFCs. A large amount of these delinquent loans would be collateralised with residential and commercial properties; however, the damage in the collateral would increase the loan to value ratio, leading to a strong haircut.