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Banking Central | Which is a safer asset for banks in the pandemic era?

Banks have been trying to de-risk their loans books from lumpy corporate assets, especially in the aftermath of crises such as IL&FS and Yes Bank. The logical shift was to retail but has it worked out?

July 26, 2021 / 10:42 AM IST
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Last week's Banking Central highlighted bad-loan trends in HDFC Bank's earnings and what they foretold for the banking industry at large. The numbers reported by some of the banks in subsequent days have pointed to growing stress on retail books.

An assessment of the FY22 earnings of some of the major lenders shows an increase in bad assets across auto, personal and even gold loans. The extent of the rise in retail non-performing assets (NPAs) is unusual compared to the first coronavirus wave.

A loan becomes an NPA if there is no repayment of interest or principal for 90 days. Banks need to set aside money to cover potential losses from such loans, which is called provisioning. Higher provisions hurt a bank’s profitability.

For instance, Bajaj Finance has reported a 19 percent jump in the auto loan division in the April-June period. The non-banking finance company (NBFC) major reported 19.15 percent gross NPAs in the first quarter against 9.31 percent in the March quarter of FY 2021 and just 5.8 percent in the year-ago period. Net NPAs, in the same segment, stood at 12. 18 percent compared with 4.84 percent in the March quarter. That is a huge jump and is a worrying sign for the industry.

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.

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Take the case of HDFC Bank, the gross NPAs have risen to a decadal high of 1.5 percent in Q1, reflecting accumulated Covid-induced stress in the retail portfolio and the impact of the health scare on collection teams' mobility.

"The bank expects collections to improve with better mobility after unlocking, while we believe that it could use the contingent provision buffer (0.7 percent of loans) to moderate LLP in H2, leading to better profitability," said Emkay analysts in a report.

During the conference calls after the results, banks partially blamed the inability of its executives to go out and collect dues on account of the pandemic-induced lockdowns, calling the retail NPA spike transitory.

But the extent of the jump in retail NPAs, especially in auto loans—Bajaj took the worst hit from three-wheeler loans­— suggests that the second wave of the pandemic has heavily hit the repayment ability of retail borrowers, and, the crisis will only worsen if a third wave hits India.

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Retail isn’t stress-proof

Such a scenario questions the high reliance on retail assets by some of the banks, especially the likes of ICICI Bank. ICICI Bank has over 61 percent of its loan book in retail.

Surprisingly, even the gold loan NPAs are inching up. Take the case of Federal Bank. Gold loan slippages stood at Rs 50 crore—or 0.3 percent of the portfolio—for the quarter ended June. Another Rs 35 crore worth of other retail accounts linked to gold-loan borrowers were also recognised as slippages. Federal Bank also restructured gold loans worth Rs 200 crore in the quarter.

Gold is the safest collateral, hence higher slippages shouldn't worry lenders too much but the trend is important.

In the words of Federal Bank CEO and veteran banker Shyam Srinivasan, NPAs in gold loans were practically no-existent but lockdown pushed some of the customers to either restructure or default. We will have to wait for more numbers from banks like Bandhan to get insights into low-income retail borrowers. These banks have the maximum exposure to microloans and the borrowers are even more vulnerable to economic downturns.

Banks have been trying to de-risk their loans books from lumpy corporate assets, especially in the aftermath of crises such as IL&FS and Yes Bank. The logical shift was to retail. This was simply because retail was considered safer. But, as we can see, retail isn't what it was hoped to be.

Those who switched aggressively from wholesale to retail over the last few years may have to be ready for some turbulence if a third wave comes.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)
Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
first published: Jul 26, 2021 10:42 am

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