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Analysis | HDFC Q1: Watch out for the moratorium loan book

The uncertainty due to coronavirus is sure to hit lending institutions in the approaching quarters. Even HDFC can’t be immune to the pandemic effects on economy.

July 30, 2020 / 06:19 PM IST
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India’s largest mortgage lender HDFC has had a challenging quarter. A 5 percent decline in net profit over the year can be partly attributed to the Rs 1,199 crore additional provisions the non-banking finance company (NBFC) had to set aside during the quarter to cover the likely Covid-19 impact.

That, however, is no surprise and is line with the industry—something unavoidable in the present business environment. Total provisions of Rs 4,452 crore also include Rs 2,453 crore provisions made on bad loans.

What is even more critical is the trend of moratorium loans. According to the figures released by the lender, 22.4 percent of the loans are under moratorium-2 (June-August) as against 27 percent in moratorium one. This means, unlike large banks which have seen a sharp reduction in moratorium-2, HDFC still has a relatively high chunk of loans under the moratorium.

This could be a worry for HDFC investors since this is an unassessed risk at his point. Only after the moratorium period is lifted, the actual chunk of stressed loans will emerge.  Also, worth noting is the trend in loan growth. In the June-quarter non-individual loans have grown faster than individual loans.

Non-individual loans refer to loans to developers. In the June quarter, non-individual loan book grew by 15 per cent compared with 11 per cent growth in the individual loan book. The reason is obvious: On account of lockdown and a general slowdown in demand, the retail business didn’t perform well forcing the NBFC to focus more on “lending to select AAA-rated corporates.”

As mentioned above, there is no point is comparing NPA figures this quarter since the moratorium was in effect. Only beginning the third quarter, lending institutions will have clarity on what percentage of moratorium loans has gone bad.

HDFC’s high moratorium figures also give us some idea why Deepak Parekh, HDFC Chairman recently requested the Reserve Bank of India governor, Shaktikanta Das not to extend the moratorium beyond August. At an interaction organised by the Confederation of Indian Industries (CII) between its national council members and RBI Governor, Parekh said:

“Please do not extend the moratorium. We see people who have the ability to pay are using this not to pay. Another moratorium will hurt us, especially, smaller NBFCs.”

Unlike HDFC, large banks have seen a significant decline in their moratorium loan book. A quick glance through the April-June results of major banks shows that the proportion of moratorium loans on their books has come down compared with the preceding fourth quarter. HDFC Bank has around 9 percent moratorium loans at the end of June while ICICI Bank has around 17.5 percent as on June 30.

The concern here is a significant chunk of moratorium loans are loans given to small- and medium-sized companies and retailers. This is the segment that has been affected most during the lockdown and may default on payments.

In his interaction with the governor, HDFC Chairman said there are many borrowers who are opting for moratorium not because they are in financial distress but simply wants to use the opportunity to preserve capital. This is harming banks and NBFCs, especially smaller ones, Parekh said.

The Covid uncertainty is sure to hit lending institutions in the approaching quarters. Even HDFC can’t be immune to the pandemic effects on the economy.

Dinesh Unnikrishnan
Dinesh Unnikrishnan
Tags: #HDFC
first published: Jul 30, 2020 06:19 pm