June quarter report card: Bank slippages rise as recast loans exit holiday period

Srinivasan Vaidyanathan, chief financial officer, HDFC Bank, said during an investor call that the agri and the wholesale accounts contributed a little more than 10 basis points (bps) to the slippage ratio of 0.5%.

June quarter report card: Bank slippages rise as recast loans exit holiday period
The rise in stress reflects the impact of some restructured loans exiting the standstill period and suggests some borrowers may not be out of the Covid woods yet.

Fresh bad loans, or slippages, ticked up for most private banks in the June quarter, according to quarterly earnings declared by early birds. The rise in stress reflects the impact of some restructured loans exiting the standstill period and suggests some borrowers may not be out of the Covid woods yet.

The country’s largest private lender, HDFC Bank, saw slippages worth Rs 7,200 crore, up from Rs 4,000 crore in Q4FY22. A part of the slippages originated from the restructured book. The bank attributed the rise to stress in the agri loan segment and the slipping of a chunky wholesale account.

Srinivasan Vaidyanathan, chief financial officer, HDFC Bank, said during an investor call that the agri and the wholesale accounts contributed a little more than 10 basis points (bps) to the slippage ratio of 0.5%.

“Some of them (customers) have taken this opportunity on the restructuring and used it to come back to normal life. Some of them who still struggle get into NPA (non-performing asset), but on a combined basis you are seeing that it continues to get benign and better,” Vaidyanathan said, adding, “Another one or two quarters, we should see it even more benign.”

Federal Bank’s slippages rose to Rs 444 crore from Rs 358 crore in Q4FY22. The retail and business banking segments led the rise, even as agri slippages eased off. MD & CEO Shyam Srinivasan said the bank’s slippages in retail for many quarters have been about Rs 140-150 crore. “This quarter, it’s higher because the restructured book will start coming through over this quarter and the next. We had guided for a roughly 20% impact on it and that’s exactly what it is,” he said.

Non-banking financial companies (NBFCs) are also seeing recast accounts hurting their overall asset quality. According to an ICICI Securities report, slippages from L&T Finance Holdings’s restructured pool led to an increased credit cost of Rs 250 crore despite the company utilising Rs 213 crore out of its management overlay buffer. “Further forward flow from the restructured pool and (cost of) proposed exit from real estate financing may keep credit cost elevated in FY23,” analysts from the broking firm said.

The Reserve Bank of India (RBI) had unveiled two restructuring schemes for borrowers impacted by the vagaries of Covid-19 in August 2020 and May 2021. Earlier this year, the central bank warned of likely asset quality troubles emerging from banks’ restructured books.

“There is…a need to be watchful of the credit behaviour of the restructured advances and possibility of increased slippages arising from sectors that were relatively more exposed to the pandemic. With the unwinding of support measures, some of the restructured accounts might face solvency concerns, with the impact on banks’ balance sheets becoming clearer in the upcoming quarters,” the RBI said in its annual report for FY22.

Some analysts have taken a more optimistic view of asset quality trends. On Thursday, S&P Global said in its global banking outlook that credit costs for the Indian banking system will stabilise at 1.5% in FY23 and further normalise to 1.3%, making credit costs comparable to those of other emerging markets and to India’s 15-year average.

“The small and midsize enterprise sector and low-income households are vulnerable to rising interest rates and high inflation. But, in our base case of moderate interest rate hikes, we view these risks as limited. With an economic pick-up, residual stress for these segments should start abating,” said Deepali V Seth Chhabria, primary credit analyst, S&P Global.

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