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HDFC Bank said the new interest rate on deposits below Rs1 crore for various tenors will come into effect from Tuesday. Photo: Mint
HDFC Bank said the new interest rate on deposits below Rs1 crore for various tenors will come into effect from Tuesday. Photo: Mint

Lenders see bad loans climbing

  • An internal assessment of its portfolio by HDFC Bank has revealed that its NPAs may rise by 50 bps
  • IndusInd Bank has found that its asset quality could deteriorate by a maximum of 80 bps due to the covid-19 crisis

MUMBAI : Bad loans could potentially rise for Indian lenders because of the covid-19 pandemic and the subsequent nationwide lockdown, according to internal stress tests conducted by HDFC Bank Ltd and IndusInd Bank Ltd.

HDFC Bank expects up to a 50 basis points (bps) impact from probable stress in small business loans.

IndusInd Bank, on the other hand, pegs the figure at a maximum of 80 bps. One basis point is one-hundredth of a percentage point.

Axis Bank Ltd has conducted a similar exercise, but it did not disclose the expected impact covid-19 will have on its asset quality. Other banks are expected to follow suit and declare their assessments.

“We have done three kinds of stress test cases: base, moderate and severe; and it is based on an intense exercise that our risk team has done. We have taken a provision of 3,000 crore in this quarter and are watching our portfolios very closely," said Amitabh Chaudhry, chief executive officer, Axis Bank.

The HDFC Bank stress test showed that 9% of its micro, small, and medium enterprise portfolio may be vulnerable. The bank studied three different scenarios of reasonable stress, strong stress and extreme stress, chief risk officer Jimmy Tata told analysts on 18 April.

“The strong stress scenario led us to a conclusion that around 9% of the small business portfolio may find themselves vulnerable to impact, meaning that they may find it difficult to honour obligations as they fall due," said Tata. However, this stress scenario does not take in account any advantages of the moratorium granted or any other concession that has been officially granted, he said.

In the March quarter, HDFC Bank reported a gross bad loan ratio—bad loans expressed as a percentage of total loans—of 1.26%, down 10 bps from the same period last year.

Experts believe small business portfolios will see significant stress and face a liquidity crunch in the coming days if banks do not resume lending to the sector.

Moreover, a government-backed credit scheme would be of much help to the sector hit badly by the disruption in economic activity.

Government guarantees are a popular below-the-line measure adopted by many countries to stimulate economies in the wake of covid-19, according to a 28 April note by ICICI Securities.

Below-the-line measures are those that do not immediately and directly impact the fiscal deficit number, it said.

Private sector lender IndusInd Bank has, in its internal assessment, used a scenario where the lockdown is lifted in phases, with half of the country opening up around mid-May or the third week of May; another 25% between the first and second week of June, and the remaining 25% in the first week of July.

“If we live with that scenario, we will not see more than an 80 bps increase in gross non-performing assets," said Sumant Kathpalia, chief executive, IndusInd Bank.

The Reserve Bank of India also assesses the resilience of the Indian banking sector to macroeconomic shocks.

In its Financial Stability Report released in December, the central bank found that under the baseline scenario, gross bad loan ratio of commercial banks may increase from 9.3% in September 2019 to 9.9% by September 2020.

However, this was before the onslaught of the covid-19 pandemic.

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