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Covid-19 Impact: Kotak Bank Expects Slippages To Rise If Lockdown Lasts Three Months

The lender said in a conference call that it hasn’t seen a flight of government deposits.

A security guard stands inside a Kotak Mahindra Bank ATM in Mumbai, India. (Photographer: Prashanth Vishwanathan/Bloomberg News)
A security guard stands inside a Kotak Mahindra Bank ATM in Mumbai, India. (Photographer: Prashanth Vishwanathan/Bloomberg News)

Kotak Mahindra Bank Ltd. expects higher slippages if the national lockdown announced by the government on the back of the novel coronavirus outbreak extends beyond three months.

The private lender, in a conference call, said that it hasn’t seen a flight of government deposits and these comprise a only a small portion of its overall deposit base. Deposits, in fact, rose following the government imposed a moratorium on its peer Yes Bank Ltd. Yet, the bank said the next 10-15 days will be an indicator of the things to come.

Key Highlights

On Covid-19 Impact

  • If the lockdown lasts for a month or so, it’s impact won’t be much and normalcy would resume quickly.
  • If the crisis continues and the lockdown extends to three months, it might lead to higher slippages. Revival of the economy could take at least 6-9 months in this scenario—which the lender expects to be the most likely.
  • In the most pessimistic scenario, where the crisis continues for a year or more, it will lead to overall chaos, where the future would be unpredictable.

Balance Sheet Focus

  • The entire focus has shifted from the P&L (profit and loss) to protection of the balance sheet as utmost priority.

Retail Lending

  • The bank said it’s concerned about the retail unsecured business. Generally, recovery infrastructure is set to handle default rate of up to 5-7 percent but in such times, they can shoot up to 10-15 percent. In unsecured lending, one must act swiftly and reach the “doorstep” of the customer, physically or otherwise, else losses can be significant. As many as 80 percent of borrowers are in a comfortable situation and have showed no signs of improper behaviour. Problem is with the “fence-sitters” that can prove to be a major problem in such times.
  • Mortage-led secured lending: Problems will be the least, with loss given defaults being limited.
  • Vehicle finance: Problems will be greater but largely contained as key players have sufficient experience.
  • Microfinance: Will face significant issues.

SMEs—Most Vulnerable

They have been in a trouble over the past year or so and will be the most stressed as they have the least liquid cash on hand and are vulnerable to defaults. Even after the removal of lockdown, there will be a lot of difficulty to get things up and running.

On Banking, Financial Services

  • The segment will undergo a major liquidity problem due to the outbreak of the novel coronavirus.
  • Expect issues with respect to asset-liability management and tightening of liquidity
  • There can be a solvency problem for some due to issues on the asset side, if assets turn illiquid and borrower behaviour worsens.

On Deposits, Liquidity

  • Seen a decent increase in savings account deposits, marginal increase in current account deposits. Term deposits have remained largely steady.

Other Highlights

  • Urban areas face bigger problem than rural areas.
  • Worst affected sectors like transportation, hotels, airlines, among others, will revive slowly, while revival would be quicker for sectors like consumables and retail.
  • In securitisation transactions, there’s a lack of clarity in the case of pass through certificates over who’ll grant the moratorium to the underlying borrower.
  • Customers still prefer MCLR-based loans as it’s easier to understand.