The initial damage to the state has exceeded Rs 50,000 crore according to the state government’s estimates. As the state now begins its long journey on the road to recovery, an important question is: what is the impact of the floods on the state’s banks.
Let’s find out.
From an overall banking perspective, the impact of the recent floods in Kerala should be negligible. This is because Kerala contributes around 3% of loans and 4% of total deposits in the Indian banking system. But when it comes to deposits by Non-Resident Indians (NRIs), Kerala contributes around 20% of the total non-resident deposits.
The overall bank business contribution from Kerala may be low, but it is concentrated among four regional banks. They are: Dhanlaxmi Bank, South Indian Bank, Catholic Syrian Bank and Federal Bank. These banks have a high dependence on Kerala with 35-65% of their loans and 50-75% of their deposits coming out of the state. These banks could be severely affected because they have a great exposure in the state. The share price of Federal Bank fell by nearly 9% from Friday.
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The crisis is still going on and the red alert has just been withdrawn from all 11 districts. At this moment, it may be too early to assess the impact caused by the floods. Kerala is a very unique state because loans for industrial activity are not very substantial. Lending is primarily dependent on agriculture and retail.
A large number of agricultural loans are backed by gold as collateral. In addition, the state receives strong deposit flows from NRIs. This could help supplement the repayment of loans in the months to come. That said it may take another three months at least to get a proper indication of the impact of the crisis.
India has had its share of natural calamities in the past: the floods in Uttarakhand and Jammu Kashmir in 2013 and 2014 respectively. According to a previous report by Kotak Institutional Equities, there was a positive loan growth in the initial year followed by a slowdown in loan growth. A similar trend could be repeated in this situation too. In addition, long term agricultural loans may be given a moratorium (waiting period where the borrower does not have to make any loan payments) of one year.
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