Lenders reported a deterioration in asset quality during the April-June quarter in loan categories where cash collections play an important role. Gold loans, commercial vehicle (CV) loans and microfinance — all saw fresh bad loans inch up in Q1FY22 as the second wave of Covid-19 hampered collection activities. The absence of a moratorium on repayments, unlike last year, made the stress more evident on lenders’ books.
State Bank of India (SBI), CSB Bank and Federal Bank were among the lenders who reported an increase in non-performing assets (NPAs) in the gold loan segment. SBI’s NPA ratio in gold loans stood at 2.24% in the June quarter. Chairman Dinesh Khara attributed the high NPA ratio in gold loans to the inability of collection staff to reach borrowers amid mobility restrictions.
CSB Bank MD & CEO CVR Rajendran said last month that a fall in the prices of gold led to margin calls and demands for additional money from borrowers. This phenomenon also played a part in the rise in bad loans. Both SBI and CSB Bank said that as lockdowns are lifted, people should be able to travel to bank branches and make good the margin shortfall.
Commercial vehicle loans have also come under pressure in Q1 as lockdowns and mobility restrictions prevented the movement of trucks carrying goods and even three-wheelers used for commutes in smaller towns. Bajaj Finance said in July that the three-wheeler business, which accounts for 30% of the company’s Rs 11,347-crore auto loan portfolio, was particularly hit in the second wave.
Rajeev Jain, managing director, Bajaj Finance, said the reason slippages were under control in Q1FY21 was the loan moratorium. “We do realise and we’ve said that many times, that’s the only business where we fundamentally deal with mass customers. We were far more impacted or they’re far more impacted,” he said.
The impact of movement restrictions was yet more pronounced in rural markets. Ramesh Iyer, vice-chairman & MD, Mahindra & Mahindra Financial Services, told analysts that rural prosperity hinges on the movement of goods and that took a hit during the second wave. “The other sentiment that we saw in the rural market that impacted us is this, many of the customers did have money, but were not able to come to pay or we were not able to go and collect,” Iyer said.
Since the repayment stress in Q1 was due in large parts to lockdowns, the lifting of restrictions across most states in June had a beneficial impact on most lenders. SBI said that in the last one-and-a-half months, it has been able to pull back Rs 4,700 crore of slippages. Most other lenders, too, have reported a recovery in collection efficiencies during June and July. However, the outlook for retail asset quality remains uncertain. Most banks and non-bank lenders expect its trajectory to depend on the likelihood of a third wave of the pandemic breaking out.