Kotak Mahindra Bank has been extremely cautious ever since the Covid-19 lockdown began in late March. That caution has continued in the second quarter as well, on all fronts.
The bank’s reported gross non-performing assets (GNPAs) at the end of September 30, stood at 2.55 percent as against 2.32 per cent in the year-ago quarter and 2.7 percent in the preceding quarter.
The GNPAs will be at 2.8 percent if one takes into account the accounts that would have turned NPA in the absence of the Supreme Court’s interim order.
The asset quality trend indicates there is continuing pressure, as the bank itself has stated in its notes on the results.
Credit growth slows
There is no hurry to expand the book. The focus appears to be on quality rather than quantity of disbursals. The loan book has declined to Rs 2,04,845 crore from Rs 2,13,299 crore in the year-ago period. The share of corporate loans to total advances has slipped further and now constitutes 26 per cent of the loan book.
The overall outstanding in absolute numbers has declined to Rs 56,119 crore from Rs 58,119 crore sequentially and Rs 60,448 crore in the year-ago quarter. The contraction is visible across retail segments, including home, vehicles, SME and consumer durables.
Home loans and loans against property continue to be the second-biggest loan portfolio after corporate loans, constituting 22 per cent of the book, followed by CVs, agriculture and SMEs.
On the deposit side, the share of low-cost deposits has improved further to 57.1 per cent in Q2, FY20, from 53.6 per cent in the year-ago quarter. Within this, average savings deposits grew 32 per cent to Rs 1,06,442 crore for H1FY21 compared to Rs 80,425 crore for H1FY20. Average current account deposits grew 10 per cent to Rs 36,610 crore for H1FY21 compared to Rs 33,216 crore for H1FY20.
Defaults on the horizon
Overall, Kotak has come out with a good set of numbers in Q2. The bank has rightly indicated that while there is an improvement in economic activity, the continued slowdown has impacted the lending business, fee income generation from sale of third-party products or usage of debit/credit cards, collection efficiency etc. This slowdown may lead to customer defaults.
Further, the bank said there is uncertainty over when life and business will get back to normal. “The extent to which the Covid-19 pandemic will impact the Bank's operations and financial results is dependent on future developments, including, among many other things, the severity of the pandemic and any action to contain its spread or mitigate its impact,” the bank said.
The next big event in the banking sector is the implementation of the one-time restructuring for Covid-linked stressed assets. To what extent the restructured loans could go bad is a concern. There are no clear estimates yet since the uncertainty over the Covid situation continues.
The challenges listed above are not unique to Kotak’s book. Keeping a strict vigil on the asset quality and finding space to expand the loan book without compromising on quality will be a tough task for the sector as a whole.