Banking Central | HDFC Bank's Q1 numbers carry a worrying message about the state of banking industry

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26 Aug, 2025 12:21

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A close look at the quarterly numbers reported by India's largest private sector lender HDFC Bank shows not all is well on the asset-quality front.

On a quarter-on-quarter basis (QOQ), the asset quality has deteriorated. The gross non-performing assets (GNPAs) at the end of June 30 jumped to 1.47 percent of the gross advances in the first quarter of FY22 against 1.32 percent in Q4 of FY21, while net non-performing assets (NPAs) jumped to 0.48 percent from 0.40 percent.

In absolute numbers, GNPAs stood at Rs 17,098 crore at the end of Q1, up 13.33 percent from Rs 15,086 crore in the preceding quarter.  The figure would be higher if one takes into account the loans written off in the June quarter (Rs 3,100 crore) and sold (Rs 1,800 crore.)

A loan becomes an NPA if there is no repayment of interest or principal for 90 days. Loans are written off once the bank is convinced that there is no immediate chance of recovery. Non-performing loans are sold to outside agencies to take some burden off the book.  Both steps indicate stress in the system. A bank needs to make higher provisions while writing off loans.

Logically, HDFC Bank’s provisions, the money set aside to cover likely losses, increased to Rs 4830.84 crore from Rs 46,93.70 crore sequentially. Higher provisions impact the profitability of a bank.

Covid stress

In the notes attached to the result, HDFC Bank's CEO Sashidhar Jagdishan acknowledged the pain and impact of the coronavirus outbreak on the bank's balance sheet and the continuation of the stress over Covid uncertainty.

The impact of COVID-19, including changes in customer behaviour and pandemic fears as well as restrictions on business and individual activities, has led to significant volatility in global and Indian financial markets and a significant decrease in global and local economic activities, Jagdishan said.

"The disruptions following the outbreak, have led to a decrease in loan originations, the sale of third party products, the use of credit and debit cards by customers and the efficiency in collection efforts. This may lead to a continued rise in the number of customer defaults and consequently an increase in provisions there against," Jagdishan said.

Further, the extent to which the COVID-19 pandemic will continue to impact the group's results will depend on ongoing as well as future developments, which are highly uncertain, including any new information concerning the severity of the COVID-19 pandemic, and any action to contain its spread or mitigate its impact whether government-mandated or elected by the bank, the CEO said.

This is an open and honest admission that the bank has no clue on how the scenario will pan out.

Traditionally, HDFC Bank is known for keeping the asset quality under control even during the toughest of market scenarios. But the spike in bad loans highlights the severity of problems on the ground even for the biggest private bank.

What lies ahead?

For HDFC Bank, a jump in NPAs may not pose any immediate concerns as it has the ability to absorb the impact. But, there is a larger signal here about the state of the banking industry.

This will be more pertinent for smaller banks and those with poor track record of recovery and have corporate-heavy books.

The impact could be harder once regulatory relaxations are rolled back and the normal recovery cycle kicks in. The recent regulatory relaxations and rule exemptions can only delay the pain if the economic recovery doesn't catch up. Vaccination is the key to containing the dreaded virus swiftly.

So far, we have seen two waves of Covid. The first wave hit the world, then largely unprepared, in 2020. The second one happened this year characterised by the different variants and more severe infections. The preparedness was better this time. Nevertheless, the severity of the spread and infection led to a loss of livelihood and pushed most states to go for localised lockdowns against a nation-wide containment in 2020.

Lockdowns have not really ended. As HDFC Bank said while the national lockdown was lifted by the government regional lockdowns continue to be implemented in areas with a significant number of Covid-19 cases.

Now, there is a warning of a “third wave” from a section of medical experts.

Till now, the real impact of Covid lockdowns has not been felt on the bank’s balance sheets. That is because two rounds of loan restructuring announcements and moratorium schemes have been announced since last year for different segments of borrowers. The real worry will emerge when the period of regulatory dispensations get over.

The Reserve Bank of India's July edition of Financial Stability Report (FSR) had suggested that banks' GNPA ratio may rise to 9.8 percent in the baseline scenario by March 2022 and can go up to 10.36 percent and 11.22 percent under scenarios of medium and severe stress, respectively. This is an improved outlook from earlier But the caveat is that sharp deviations in the expected Covid trajectory can upset all such calculations.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)