The third quarter results of HDFC Bank, the largest private lender, shows overall improvement across key components. Loan and deposit growth numbers are healthy and asset quality showed improvement. Loan book, the bank said, increased by 15.6 percent on a year-on-year (YoY) basis at Rs 10.82 lakh crore and deposits by 19.1 percent YoY to Rs 12.71 lakh crore at the end of December quarter 2020.
According to the bank’s disclosures, the restructuring under the RBI’s resolution framework for COVID-19 was approximately 0.5 percent of the advances. This is much less than what was initially projected by analysts. The lower percentage of loan recast figures indicate that the stress among corporations may not be as big, at this stage, as initially projected. But much will depend on future economic recovery.
But, one aspect that needs a closer look is the asset quality figures. What is the actual non-performing asset (NPA) numbers on its books?
The bank has said its gross NPAs, as a percentage of gross advances, fell 27 bps sequentially to 0.81 percent for the quarter ended December 2020, while net NPA declined to 0.09 percent in the quarter ended December 2020, compared to 0.17 percent in September quarter 2020.
But, that’s excluding the portion not tagged as NPAs following a Supreme Court (SC) interim order. Banks cannot classify NPAs that are standard as on August 31 until a final SC order is issued.
If HDFC Bank had classified borrower accounts as NPAs after August 31, the proforma Gross NPAs would have been 1.38 percent as on December 31 as against 0.81 percent reported.
Similarly, the net GNPAs would have been at 0.4 percent as against the reported 0.09 percent. The difference in GNPA numbers is 57 basis points and that of gross NPA figures is 31 bps. One bps is one-hundredth of a percentage point. What this shows is that without the SC dispensation, the actual NPAs would have been notably higher.
For HDFC Bank, even after adjusting this component, the overall NPAs are one of the lowest in the banking system. There is no major concern. Also, HDFC Bank has provided more than required to cover the likely shock from COVID impact on its loan book.
Going by the bank’s declaration, it held total floating provisions of Rs 1,451 crore and contingent provisions of Rs 8,656 crore as at end December. Total provisions, it said, were 260 percent of the reported gross NPAs or 148 percent of proforma gross NPAs as on December 31.
But the widening gap between actual and proforma NPAs gives an indication of the larger bad loan trend in the banking industry. The key question arises here is this—what is the actual picture of NPAs in the banking industry excluding the regulatory dispensation availed as part of COVID measures announced by the central bank and SC intervention?
One needs to wait for the earnings cards of other banks to get a clear pattern on the actual asset quality trend in Q3.
The RBI has cautioned of a significant spike in NPAs this year even in a base case scenario. The report, a key document on the macroeconomy, suggested Indian banks’ gross non-performing assets (GNPAs) could grow to 13.5 percent of the total loans by September 2021 in a base case scenario and 14.8 percent in a worst-case scenario. The gross NPAs of banks stood at 7.5 percent in September 2020. This means NPA levels will nearly double even going by the base case scenario.
COVID-19 can punch a big hole in the books of Indian banks.