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 told analysts over a conference call.

HDFC Bank Ltd. 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.

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