Analysis | NPA woes continue for banks, NBFCs in Q1; will the next quarter be better?

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The second coronavirus wave was to leave the Indian banking sector unscathed when compared to the first one. The hit on the books has indeed been softer than what the industry saw in 2020, with higher buffers shielding the banks. Still, the furious second wave that saw record infections and deaths has affected collections and recoveries at all levels.

The numbers of Axis Bank, released on July 26, are the latest to confirm the larger trend. The bank’s gross non-performing assets (NPAs) and net NPAs in the April-June quarter rose to 3.85 percent and 1.2 percent, respectively, against the GNPA and NNPA ratio of 3.7 percent and 1.05 percent in the previous quarter.

The chunk of low-rated papers increased, with the BB and below book inching up sequentially by 10bps to 1.19 percent of the customer assets and reported restructured advances of Rs 2,200 crore ( about 33bps of gross loan book).

Gross slippages during the quarter were Rs 6,518 crore, which were higher than Rs 5,285 crore logged during Q4FY21 and Rs 2,218 crore in Q1FY21.

"Slippages in Q1FY21 were moderated due to regulatory forbearances that do not exist in the current quarter. Recoveries and upgrades from NPAs during the quarter were Rs 2,543 crore while write-offs were Rs 3,341 crore. Consequently, there were net slippages in NPAs (before write-offs) for the quarter of Rs 3,976 crore," said Axis Bank.

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The same is the case with Kotak Mahindra Bank. The gross NPAs stood at 3.56 percent against 3.25 percent on a sequential basis whereas the net NPA came at 1.28 percent from 1.21 percent. “Fresh NPA formation was higher at Rs15 billion (3 percent of loans), mainly due to higher stress in secured products such as CV/CE and mortgage,” said Anand Dama of Emkay Global.

These numbers are in line with the trend shown by other banks—HDFC Bank, ICICI Bank and big NBFCs such as Bajaj Finance (auto loan NPAs of 19.15 percent against 9.31 percent in the March quarter of FY 2021 and just 5.8 percent in the year-ago period), L&T Finance and M&M Finance (where GNPAs rose to 15.5  percent against 9 percent last year).

NBFCs take a bigger hit

The asset quality impact on NBFCs has been far higher than banks,  said Sidhharth Purohit, research analyst at SMC Global Securities.

“The problem seems to be higher for NBFCs. That's the trend see the results of M&M Finance...one of the weakest quarter ever. Vehicle finance is a concern both low freight and high fuel cost will be an issue even going ahead,” Purohit said.

One reason why NBFCs are hit severely is because lockdown-like restrictions have affected public transport, impacting demand.

Retail, too, has felt the pain in Q1. ICICI Bank, which reported its Q1 earnings on July 24, too, showed higher retail slippages. Of the Rs 7,231 crore GNPAs reported in the quarter, Rs 6,773 crore came from the retail side. If one looks at the Rs 3,891 crore restructured book in Q1 under RBI's scheme, Rs 925 crore were personal loans.

Banks were expecting a relatively lesser impact this year for two reasons. One, there was no nationwide lockdown like the one in 2020. Restrictions were more local. Second, banks were better prepared to handle shocks on account of higher provisions.

"It was expected that there will be an increase in NPAs for most banks," said Jyoti Roy of Angel Broking. "But the overall impact is much less as compared to the first wave. Impact much lower than the first wave. And things improving on the ground very rapidly. Barring a bad third wave, things should normalise by the end of Q2," Roy said.

As Roy said, the impact is not as severe as the first wave. But, some segments have certainly surprised the industry. Obviously, NBFCs have been hit harder than banks. Even now, the pain may not be over. The approaching quarters will be crucial and much will depend on the pace of vaccination and the Covid trajectory.