Kerala floods could lead to a surge in bad loans at India’s regional banks

• The economic distress from the recent floods in Kerala is mounting. Total losses have been pegged at ₹210 billion.
  
• A recent report by India Ratings predicts that two-Kerala based banks, Federal Bank and South India Bank, could see a 20-25% surge in their bad loans as a result of the floods.
  
• Most of the banks in the region focus their lending on the two sectors that have been adversely impacted by the floods - SMEs and agriculture.
  

The economic distress from the recent floods in Kerala is mounting. Total losses have been pegged at ₹210 billion. The state’s GDP for the current financial year is expected to fall by 1 percentage point. Insurers are readying a payout of ₹13 billion for motor and property claims alone. The national production of rubber and coffee is also expected to take a huge hit.

And now, the balance sheets and financial strength of banks in the region are predicted to deteriorate significantly. Around five banks, including Federal Bank and South Indian Bank, are based in Kerala with a quarter of their loan book concentrated on the state. Infact, a recent report by India Ratings, predicts that Federal and South India could see a 20-25% surge in their bad loans as a result of the floods. Even microfinance institutions will see their operations affected owing to defaults.

Last week, the CEO of Federal Bank, Shyam Srinivasan, said that the bank’s non-performing loans could rise by as much as 30% within the next few quarters owing to its high level of exposure to the rubber and tourism industries.

Most of the banks in the region focus their lending on the two sectors that have been adversely impacted by the floods - small and medium-sized enterprises (SMEs) and agriculture. While agricultural output in Kerala will most definitely take a hit in the near term, even small businesses will suffer due to the loss of inventory, property damage and irregularity in cash flows.

This in turn, will inevitably affect the ability of farmers, agricultural collectives and small business owners to pay back their loans. To soften the blow to creditors in the agricultural sector, the government has allowed a one-year grace period for interest and five-year grace period for principal payments on these loans. So banks will not have to immediately recognise these accounts as stressed.

In the short term, banks could see a windfall in deposits as a result of a spike in remittances to the state. The floods are expected to unleash a wave of payments from Indian diaspora to their families. The absolute value of remittances will also be given a boost due to the weak rupee.