Indeed, the risk of credit growth slipping into negative territory is quite real now, Anand Rathi Share and Stock Brokers said in a recent report.
The Covid-19 outbreak, associated lockdowns and intensified risk aversion on the part of banks have started to weigh on their revenues, with non-interest income dropping for most private lenders in Q1FY21. Shrinking consumption hit credit card fees and lower originations and disbursements meant there was little to rake in, in the form of processing fees.
Six leading private banks saw their total non-interest income slide 27% year on year (yoy) to Rs 9,911 crore, data compiled by FE showed. While interest income continues to grow at most banks, as it is derived from existing loans outstanding, the tendency to avoid risk in an uncertain environment is reflecting in their fee income.
HDFC Bank’s other income declined 18% yoy to Rs 4,075 crore. Fees and commission income constitute 55% of other income for the bank, and it stood at Rs 2,231 crore — 37% lower than the previous year. Retail constitutes approximately 89% and wholesale constitutes 11% of fees and commission, Srinivasan Vaidyanathan, chief financial officer (CFO), HDFC Bank, told analysts. “The extended lockdown during the quarter following the Covid outbreak has impacted the business across the bank, which is loan originations, distribution of third-party products, payment product activities and so on,” he said, adding that waiving of certain fees for customers have also been implemented in accordance with the Reserve Bank of India’s (RBI’s) mandate. “These have affected the fees and commission by approximately Rs 1,700 crore,” Vaidyanathan said.
Axis Bank’s other income fell 33% as the lender moved to a more conservative system of recognition of fee items at a time of falling business. “The broad areas where changes were implemented in the current quarter were fee and expense recognition and provision on standard investments and red flagged accounts,” said Puneet Sharma, CFO, Axis Bank. The bank had a practice of recognising non-refundable fees upfront on letters of credit and annual fees on debit cards. During the quarter, the bank changed this practice from upfront recognition to amortisation over service period.
Aside from this, the bank’s total fee income in Q1FY21 was down 38% yoy. Almost 60% of the decline was due to lower processing fees on retail loan disbursements, which were down 74% and card fees (down 53%), impacted by lower new card issuance-related fees and interchange income. Other fee items that also got impacted were service charge waivers pursuant to regulations, cash management fees and syndication fees, the management said.
Indeed, lenders are increasingly blunt in admitting their wariness, given the environment. Vishwavir Ahuja, MD and CEO, RBL Bank, on Tuesday said, “At a time like this, we need to be conservative and more mindful of protecting our own balance sheet. We just need to be strong enough in terms of all the critical parameters to make sure we come out stronger on the other side,” Ahuja said, adding that the lender’s focus is on asset quality, capital conservation and profitability. “If I don’t grow my balance sheet by another three to six months, it’s fine with me, as long as the other things are met,” he said.
Yet, there are fresh concerns emerging on the growth front. Analysts said credit growth could eventually become a bigger challenge for banks than asset quality risks. In a note on Wednesday, India Ratings and Research said, “While some amount of risk aversion was playing out in the market before the pandemic, the credit offtake has taken a severe beating with the onset of the Covid-19, resulting sustained, excess system liquidity…Ind-Ra believes that it will be imperative for banks to expand balance sheets and simultaneously revive credit offtake, rather than focusing only on asset quality.”
Indeed, the risk of credit growth slipping into negative territory is quite real now, Anand Rathi Share and Stock Brokers said in a recent report. “Private banks have scaled down lending more and are likely to see greater deceleration in NII (net interest income) despite a likely rise in the net interest margin (NIM) due to the more pronounced drop in deposit vs. lending rate,” the report said.
For now, at least, banks are in no mood to budge. As Dipak Gupta, joint managing director, Kotak Mahindra Bank, said, they would wait and watch till there were signs of the pandemic wearing itself out. “This cautiousness will continue probably till one sees at least signs of the pandemic peaking. Once peaking is there, then there is more surety of the aftermath. Until then, we will just be cautious,” he said.