Small Borrowers Drag Down Private Bank Asset Quality In Q1
Nearly three of every four bad loans added during the June quarter were loans made to retail and business banking borrowers of private banks, indicating the level of stress caused by the second wave of the pandemic.
The top six private banks added nearly Rs 21,000 crore in bad loans in the first quarter, according to data collated by BloombergQuint. Retail and business banking loans, that is - loans to individuals and small businesses, contributed nearly 73%.
India battled a deadlier second surge of Covid-19 in April-May. Reasons for the spike in bad loans ranged from bankers not being able to reach customers to collect dues to borrowers delaying repayments to save cash for emergency medical needs. Despite fears of a third wave, most private lenders expect asset quality to improve in the second half of the fiscal.
"We faced severely curtailed collection workflows during the quarter due to restrictions of personnel on the field and both concern—health and safety concerns of our staff as well as the customers," Srinivasan Vaidyanathan, chief financial officer at HDFC Bank Ltd. told analysts over a conference call.
HDFC Bank did not disclose the split between corporate and non-corporate slippages. The bank's gross slippages (loans that deteriorated into non-performing) in April-June stood at Rs 7,300 crore, with nearly Rs 900 crore coming from the agriculture portfolio.
The higher addition of bad loans during the quarter pushed its gross non-performing asset ratio up by 15 basis points sequentially to 1.47%.
The bank also saw stress emerge in the commercial transportation sector, owing to rising diesel prices, Jimmy Tata, head-credit and market risk, told analysts.
The bank's pool of restructured assets constituted 0.8% of the loan book as of June compared with 0.6% three months earlier. Nearly 70% of these restructured loans were from the retail book.
"They expect some of these NPAs to be resolved as collection efforts kick in again. HDFC Bank booked 42 bps of provisions during the quarter (5 bps was additional contingent provisions)," Bernstein Research said in its July 18 report. "The bank said there could be additional restructuring cases in the coming quarter, some of which could come from the Q1 additional NPAs."
Peer ICICI Bank Ltd. added Rs 7,231-crore in bad loans during the quarter. Of these, nearly Rs 6,400 crore came from retail and business banking borrowers, accounting for over 90% of the fresh NPAs. Retail slippages included Rs 961 crore from the Kisan Credit Card book and Rs 1,130 crore from the bank's gold loan portfolio.
The rising stress in the retail loan book spurred the bank to become more conservative on provisioning against retail bad loans. Sandeep Batra, executive director, ICICI Bank told the media on July 24 that the bank had made additional provisions worth Rs 1,200 crore against retail bad loans in the first quarter.
"On the one hand, the bank tightened provisioning policy and, on the other, utilised part of Covid buffer (now at 90 bps of loans), keeping credit cost in check," analysts at Edelweiss Securities said in a July 24 note.
Research Reports On Q1 Earnings
For Axis Bank Ltd., retail and small business loans contributed 57% of the gross slippages worth Rs 6,518 crore. Addressing the press on Monday, Chief Financial Officer Puneet Sharma said that 22% of the gross slippages were upgraded to standard category within the April-June quarter, reducing the pool of net slippages.
"Retail loans constituted 84% of the net slippages during the quarter," Sharma said.
Most of the slippages were due to lack of collections due to the second Covid-19 wave even though there has been an improvement since June. The bank's management has guided for improved recoveries and lower slippages by December, subject to no third wave of Covid-19.
While most analysts raised their target estimates for Axis Bank, analysts at Macquarie Research lowered their recommendation to 'neutral' from 'buy' earlier.
Secured Loans Add To The Stress
For private lenders like Kotak Mahindra Bank Ltd. and Federal Bank Ltd., slippages rose in the secured retail and business banking lending portfolio. Most of this was because collection was hampered during the quarter.
Of Rs 1,000-1,200 crore worth of retail and business banking slippages reported during the quarter, Kotak Mahindra Bank saw a marginal rise in bad loans from its mortgages portfolio, Uday Kotak, vice chairman and managing director, told analysts.
"Tractors and commercial vehicles is where we saw the bulk of the impact, and to a certain extent in construction equipment where people had an issue about getting money from state governments during the quarter," Kotak said.
D Kannan, group president-commercial banking at Kotak Mahindra Bank, explained that while collections in the commercial vehicle segment were through the banking system, there was a rise in the bounce rate or an increase in cases of dishonoured checks or failed electronic repayments.
"But once the bounce happens, you need to reach out to the customers even to collect an instrument or collect by cash. So, as Uday mentioned, we had a problem in reaching out to the customer and a lot of customers held back cash for unforeseen medical expenses," Kannan said.
Another concern for Kotak Mahindra Bank was the sharp rise in special mention account category or loans overdue for more than 60 days but still not non-performing assets. The bank reported SMA-2 book worth Rs 430 crore in the first quarter, up from Rs 110 crore as of March.
IndusInd Bank, too, saw elevated slippages from the commercial vehicle portfolio. Of Rs 2,342 crore worth of consumer banking bad loans, Rs 1,060 crore came from the vehicle finance portfolio alone.
For Federal Bank, of Rs 127-crore retail slippages, about 60% came from the home loan portfolio and the rest from loan-against-property book. Slippages from retail, business banking and agriculture portfolios stood at Rs 453 crore in the first quarter.
Similarly, on the gold loan portfolio, Federal Bank saw slippages worth Rs 50 crore and Rs 225 crore worth of restructuring. The gold loan slippages were in accounts where the bank had allowed a loan-to-value ratio of 93% after the regulator eased terms last last year, Shyam Srinivasan, managing director and chief executive offer, told analysts.
While exit collection efficiency has improved, the performance of SMA book at about 5%, SME loan book, restructured book and lack of any contingency buffer whatsoever will be crucial in shaping future trends, Edelweiss Securities said. The research house is building in elevated credit costs for the bank.