Retail Loans Dominated Covid Restructuring For Top Private Banks

India’s top private lenders restructured more retail loans than they did corporate advances in FY21, show disclosures made alongside earnings for the quarter ended March. While overall restructuring has been low, the share of retail borrowers seeking easier terms dominates.

The top seven private banks that have reported earnings so far have restructured loans worth Rs 11,275 crore, with retail loans making up 67% or Rs 7,519 crore of the total pool, according to data collated by BloombergQuint.

Most of these retail loans came from HDFC Bank Ltd., which restructured retail loans worth Rs 5,456 crore. This constituted 92.5% of the total loans recast by India’s largest private sector lender last financial year. For Axis Bank Ltd., this share was 59.6%, 87% for Kotak Mahindra Bank Ltd. and 100% for RBL Bank Ltd. ICICI Bank Ltd., IndusInd Bank Ltd. and Yes Bank Ltd. were three lenders who restructured more corporate loans than retail advances.

Banks don’t disclose the number and amount of requests received compared to those approved, making it difficult to assess whether some lenders were more conservative than others in approving restructuring.

Banks have time till June 30 to restructure loans to corporate borrowers. Under the RBI’s rules, banks had to implement schemes within 90 days of invocation for retail borrowers and within 180 days for corporate borrowers. As such, complete data for the first round of restructuring will emerge only at the end of the June quarter. In addition, the RBI has reopened the scheme for retail and small business borrowers.

HDFC Bank’s relatively large restructuring, according to Jimmy Tata, chief credit officer at the lender, followed after it opened up the scheme to all who requested it. A lot of it was precautionary, he said.

In the initial days, the bank had put in place a process where the borrower had to demonstrate the need for restructuring and was extended only if there were signs of distress. “But as soon as it (restructuring scheme) got opened up and it was allowed on request, we were much more forthcoming in permitting the restructuring, and that’s pretty much reflected in the fact, that very a large chunk of it is not delinquent at this point in time,” Tata told analysts.

In comparison, Axis Bank refrained from restructuring much.

“...in case of retail slippages that happened because of Covid or what we went through in this last year, we didn’t rely on restructuring or the amount of restructuring which we have done on the retail side is minimal,” Chief Executive Officer Amitabh Chaudhry told analysts after the bank’s earnings. “So, whatever has slipped had to slip because there was no other mechanism which we used to so-call manage our portfolio.”

As of March 31, the bank had restructured retail loans worth Rs 503 crore under the one-time restructuring scheme, out of the total book of Rs 844 crore.

Kotak Mahindra Bank barely restructured any loans with the pool of such debt at Rs 95 crore. “Patchwork will not work and lenders must face the reality,” Uday Kotak, the bank’s chief executive officer, said on a media call when asked about the need for a new restructuring window. “The right approach is to face the reality and take the impact on the chin.”

Smaller peer RBL Bank restructured loans worth Rs 467 crore, which belonged entirely to its retail borrowers. Addressing the press after announcing the quarterly results, Chief Executive Officer Vishwavir Ahuja said losses came from its unsecured retail book.

Restructuring As A Share Of Retail Portfolio

Looking at restructured loans as a ratio of the retail loan portfolio, RBL Bank’s 1.36% is the highest among private banks so far. Previously the bank had faced pressure from its corporate loan book but the stress is now emerging from unsecured retail lending.

“The bank has recognized high stress in retail but coverage ratio (50% levels) is low. FY22 would see a catch-up in provision coverage along with normal credit costs,” analysts at Kotak Institutional Equities said in a report on May 4.

HDFC Bank’s retail restructured book covered 1% of its retail loan book of Rs 5.27 lakh crore.

“In our view, most of the restructured pool for HDFC Bank is coming from the self-employed retail pool of customers,” said Gautam Chhugani of Bernstein Research. “The management has taken a call to restructure these loans and give the borrower more time, given the current environment.”

For lenders like Axis Bank, while the retail restructured book constituted only 0.14% of the retail loan book, the stress showed up in slippages. Retail slippages during the quarter ended March was at 3.73% annualised and net slippages after deducting upgrades and recoveries stood at Rs 1,324 crore, the bank said. A number of the retail slippages were one-time in nature and Axis Bank was unlikely to see such elevated fresh bad loans in the quarters ahead, Chief Financial Officer Puneet Sharma told analysts.

Yes Bank and Kotak Mahindra Bank had the lowest restructured loans as a percentage of the retail loan book.

More Restructuring Coming?

Since the RBI has reopened the restructuring window, banks will now be able to recast retail and small business loans until the end of September.

Analysts at Edelweiss Securities said loans that remained irregular during the last financial year, are the “motherlode” of future stress for the banking sector. However, the disruptions being experienced during the second wave are unlikely to affect those who have maintained a regular repayment record so far.

“Admittedly, current events could certainly ensure that a larger proportion of the ‘motherlode’ may get stressed, but for banks like HDFC, Kotak, ICICI and Axis, the provisioning-capitalisation combo still ensures low impact,” Edelweiss Securities said in its report on May 6.

Suresh Ganapathy of Macquarie said large banks are unlikely to make use of the extended restructuring window too much, since they have already recognised most of the stress in their retail and small business portfolios.

“In the absence of any moratorium or credit guarantee scheme and smaller borrowers being more vulnerable, NBFCs (non-bank finance companies) may use this scheme more,” Ganapathy said in a report on May 5. “We’ll be keenly watching the restructuring done under the second window by all players to assess the true quality of balance sheet.”