Is HDFC Bank not telling you something about its bad loans?

A customer walks outside an HDFC Bank branch in Mumbai July 17, 2013. India's HDFC Bank Ltd posted on Wednesday a 30 percent rise in first-quarter net profits, in line with expectations, boosted by higher fee income and credit growth. REUTERS/Danish Siddiqui (INDIA - Tags: BUSINESS) - RTX11P4B

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HDFC Bank, one of most valued banks globally and the cleanest among Indian banks when it comes to non-performing assets (NPAs), has seen an “unhappy secret”, according to a report by Bloomberg.

While most banks are battling a high amount of bad loans from largely around 4-5 percent to as high as 25 percent, HDFC Bank, country’s second largest private lender, has maintained the gross NPA ratio at 1.26 percent of its total loan book size.

The Aditya Puri-led bank also has a price-to-book value ratio at 5.2 percent, the value it gives to its investors in the stock market.

However, despite being largely insulated from the most notorious financially-troubled infrastructure, steel, power companies and road & construction sectors, HDFC Bank was hit by the NPA "divergence" storm last month after Reserve Bank of India, in its annual risk based supervision, asked the bank to classify one account as an NPA.

RBI took this move after a reported divergence in its classification of NPAs and its provisions in comparison to the bank’s classification as on March 31.

The Bloomberg quoted a report by independent analyst Hemindra Hazari, who said in the his analysis, “It is now clear that the unnamed and disputed corporate non-performing asset (NPA) in HDFC Bank Limited [2QFY2018 results was Jindal Steel & Power Ltd (JSPL)]…A letter from the bank to JSPL makes clear, however, that the account was irregular and overdue but probably within the 90-day grace period as on end September 2017. What is even more curious is that JSPL, which was having difficulty servicing its bank debt, is now borrowing high-cost funds from a non-bank finance company (NBFC) to settle its overdue with banks."

HDFC Bank did not respond, at the time of publishing this article, to queries sent by Moneycontrol seeking clarification on the exposure to JSPL.

Jindal Steel had net debt of Rs 44,000 (USD 6.8 billion) at the end of September 2017.

According to Bloomberg, HDFC Bank should acknowledge the "divergence" between its self-reported and RBI-assessed NPAs. But doing so would also mean admitting that those soured loans, net of provisions, were 95 percent more than disclosed in the full-year accounts.

Such a divergence in asset classification of NPA accounts emerged in two other banks - Axis Bank at Rs 5,633 crore and Yes Bank at Rs 6,355 crore.

Also Read: NPA divergences point to a need for bank auditors to have a dialogue with RBI

So far, HDFC Bank has not disclosed the quantum of the exposure but stated that it has made a provision of Rs 700 crore, adequate as per the RBI’s norms for NPAs.

Without mentioning the word “divergence, a day after it announced the second quarter results, HDFC Bank in a statement said, “With specific reference to the part pertaining to the project loan account which underwent flexible structuring as approved by the Joint Lenders Forum and for which the Bank had made contingent provisions. The Bank has received communication from the regulator advising it to classify the said account as a non-performing asset. The same has been duly complied with.”

The Bloomberg report said, “If the corporate account exposure exceeds Rs 8.84 billion or Rs 884 crore (i.e. 15 percent of the bank’s announced FY17 gross NPAs), the bank will be in the embarrassing position of having to disclose the divergence in the RBI format. Such a divergence was not expected from India’s largest bank by market capitalization, a bank that trades at 5.2x price to book value.”

The Bloomberg report also acknowledges if questions would be raised about the RBI. “The RBI can't arbitrarily force some lenders to appear less than truthful, while sparing others the humiliation of a mea culpa.”

Earlier, speaking to Moneycontrol, former RBI deputy governor SS Mundra has said, “Sometimes, it is quite possible that NPAs may be recognised in one bank and not in another. At times, when the RBI is inspecting, the availability of information is slightly better than the bank auditors and also the timeline is better.

“So, there are also interpretational issues. However, this should account for a limited difference. There may be genuine reasons that some parties (banks or auditors) may not be clear. Now that two cycles are over, the bank Board, auditors must pick these up and engage into discussions with the management and RBI. I would prefer more engagement than judge that as a misconduct on the part of auditors,” he added.

With the stakes this high, the RBI needs to crack the whip of asset classification with a steady hand -- one that treats creditors fairly and borrowers correctly. Meanwhile, HDFC Bank must present a more accurate picture of its soured loans. After all, bad things can happen even to great banks, the report added.