Analysis| HDFC Bank prepares for COVID-19 shock

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.