HDFC Bank reportedly has about nine percent of its loans presently under moratorium at the end of June quarter. The bank's Q1 result notes were silent on the moratorium loan details. The moratorium loans, along with about 29 percent unsecured loans on its book, will be watched closely going ahead in the COVID-19 scenario. In the press release issued post the result announcement, HDFC Bank said it has ramped up provisions against the potential impact of COVID-19 based on the “information available at this point in time” and the same are in excess of the RBI prescribed norms.
The RBI first announced the loan moratorium in March and extended the facility till August due to the weak economic scenario. Industry analysts believe that at least 5 percent of the moratorium loan could go bad in the banking sector as COVID-19 has impacted the repayment ability of a good number of borrowers.
Provisions, as stated above, have increased. In the quarter, the bank held floating provisions of Rs 1,451 crore and contingent provisions of Rs 4,002 crore as on June 30, 2020. Total provisions (comprising specific, floating, contingent and general provisions) were 149 percent of the gross non-performing loans as on June 30, 2020. Gross non-performing assets were at 1.36 percent of gross advances as on June 30, 2020, as against 1.26 percent as on March 31, 2020.
What do these numbers tell us? Provision is the money set aside by banks under RBI norms to cover likely losses in problematic loan accounts. In this case, logically, HDFC Bank expects significant pain going ahead from the COVID-19 shock. It is pertinent to note the comment that the bank has used its analytical models to determine slippages during this quarter, resulting in a more expedited recognition of NPAs, as well as accelerated corresponding specific provisions. So what we know is the bank has a clear assessment of the likely asset quality shock and the provisions in Q1 need to be seen in that context.
How significant will be the asset quality shock? We don’t have enough data to form an opinion yet. The bank has admitted that COVID-19 has already taken a toll on the retail loan book. “The continued slowdown in economic activity has led to a decrease in retail loan origination, sale of third party products, use of credit and debit cards by customers, efficiency in collection efforts and waivers of certain fees. As a result, fees/other income were lower by approximately Rs 2,000 crore,” the bank said.
In the retail loan portfolio, the auto loan portfolio has shrunk to Rs 81,082 crore from Rs 83,935 crore while the home loan portfolio declined to Rs 62,652 crore from Rs 63,445 crore. Two-wheeler loans shrank to Rs 9,568 crore from Rs 9,855 crore. Clearly, the COVID-19 stress is visible on the books of HDFC Bank. To be sure, that is in line with the industry trends. Most banks have increased upfront provisions to prepare for the COVID-19 shock. The next quarter will offer a clearer picture.
(The article was updated after the bank disclosed the moratorium loan details)