Economic recovery in India hinges on moratorium duration: Chris Wood

Wood sees a potential for forced selling of property portfolios of the stressed developers
The decision on whether to extend the moratorium on loans till December 2020-end will be a crucial factor in determining the pace of recovery for the economy, banks and the real estate market in India, wrote Christopher Wood, global head (equity strategy) at Jefferies, in GREED & fear — his weekly note to investors.

“A critical question for the banks, the property market and indeed the economy is now whether the moratorium is extended yet again. Still until proven otherwise, investors should probably assume that the moratorium will be extended for another four months to the end of the calendar year,” Wood said.

Still a negative from the government’s standpoint, Wood believes, is that such a restructuring would be outside the recently established bankruptcy process, though presumably the special circumstances of Covid-19 could be used to justify the move.

Earlier this year, the Reserve Bank of India (RBI) had allowed banks and financial institutions to offer a moratorium of three months on payment of instalments on all term loans, which was subsequently extended by another three months till August-end.

Wood believes moratoriums are hard to end and forbearance is forced on the banking sector, which (including NBFCs) still accounts for 19 per cent of the MSCI India index, though down from a peak of 27 per cent in December 2019. Moratorium, he suggests, could trigger a consumer lending non-performing loans (NPL) cycle.

“It is interesting that Indian banks have taken advantage of the recent stock market rally to announce capital raisings, with $13 billion of equity raising by private sector banks and NBFCs now in the pipeline. GREED & fear would interpret this planned capital raising as primarily defensive in nature,” Wood wrote.

The lockdown, according to Wood, has dealt yet another body blow to the Indian residential property market where he now sees a potential for forced selling of property portfolios of the stressed developers, most particularly if the moratorium is not extended beyond August.

“For now, the moratorium means that the price discovery process has stalled, particularly in the high-end residential market and in commercial property. A property consultant hosted by Jefferies’ Indian office this month estimated that such forced sales could lead to a 30 per cent write-down in values on loans extended to the stressed developers,” he wrote.

Growth forecast

As regards economic recovery, Jefferies’ expects real gross domestic product (GDP) to contract 5 per cent this fiscal year. Those at Nomura, too, share a similar view and expect the expect GDP growth to remain in negative territory for the next three quarters (-5.6 per cent in Q3CY20, -2.8 per cent in Q4CY20 and -1.4 per cent in Q1-2021), averaging -5 per cent y-o-y in 2020 and -6.1 per cent in FY21.

Analysts at HSBC, however, caution that the GDP releases under Covid-19 pandemic do not fully capture the state of the economy. India, HSBC said, runs an informal sector survey every five years and revises past GDP growth data accordingly and the last such survey was conducted before demonetisation.

“As such the GDP numbers since demonetisation do not capture the true state of the informal economy. This time around too, GDP releases may not fully capture the weakness in economic activity, until it is updated with a new informal sector survey a few years down the line,” wrote Pranjul Bhandari, chief India economist at HSBC in a co-authored July 23 note with Aayushi Chaudhary and Priya Mehrishi.

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