Lenders fear bad loans lurking underneath retail assets

Mumbai: Baffled by low retail debt recasts, despite palpable stress on the ground, bankers are concerned that it could snowball into unanticipated proportions.

Lenders said most of their one-time restructurings have been invoked for corporate loans and only a handful for retail loans. Although, measured by volume, corporate loans will always overshadow individual loans, bankers believe it is possible that the recast scheme was unable to manage retail stress.

Both Canara Bank and Bank of Baroda (BoB) said 80% of their approved debt recasts are from the corporate sector and the rest from the retail segment. While Canara Bank has invoked one-time restructuring for loans worth ₹11,000 crore, the number is a tad lower at ₹9,500 crore for BoB. Private lender Axis Bank also said 0.8% of the corporate book is up for recast and only 0.3% of the retail book will see easier repayment terms on account of covid-19 distress.

“This means that people could actually start paying up on time, but there is a fair possibility that some stress will come through non-performing assets (NPAs),” said Sanjiv Chadha, chief executive, Bank of Baroda.

Besides, moratoriums tend to alter the repayment habit of borrowers which takes time to correct itself. The Reserve Bank of India (RBI) allowed lenders to provide a six-month moratorium that ended on 31 August. However, an undecided petition in the Supreme Court with an interim order on bad loan classification has led to an informal extension of the moratorium.

The RBI has already painted a pretty bleak picture of the future bad loan situation. The bad loan ratio of banks in India could rise 600 basis points (bps) to 13.5% under the baseline stress scenario by September this year, the highest in over 22 years, RBI said. The gross bad loan ratio of banks stood at 7.5% as on 30 September 2020.

Amitabh Chaudhry, chief executive, Axis Bank said on 27 January that the quarterly earnings performance was punctuated by the expected rise in retail slippages. However, since restructuring requests remain lower than initial expectations, the bank hopes that the pain emanating from covid -19 should be transient, with moderation in FY22.

“This outcome, however, will be predicated on the future economic recovery as envisaged today. We expect that the second half of FY21 performance will reflect most of this transient pain across the banking and financial services space,” said Chaudhry.

Retail asset quality has not significantly improved over the past year even as bad loans and aggregate stressed assets in the corporate sector declined. RBI said in its Financial Stability Report on 11 January that in the case of retail advances, gross bad loan ratio declined only marginally, and stressed advances remained flat.

However, some comfort can be derived from the lower bounce rate seen in auto-debit and other equated monthly instalment collections. It showed that after months of severe distress, retail repayments seem to be limping back to normalcy with fewer defaults on auto-debit transactions in December. Data from the National Payments Corp of India (NPCI) showed that 38% of all auto-debit transactions failed in December, about 200 basis points lower than November, still higher than the pre-covid run rate.

Chaudhry of Axis Bank also said over the past few months, bounce rates have continued to improve and the private lender’s demand resolution in December stood at 98%, in line with the best in the industry. India’s largest private lender HDFC Bank also witnessed improved demand resolution by 200 basis points (bps) to 97%, slightly lower than 98% seen before the pandemic.

“Looking at the cheque bounce trends, these have also been improving month-on-month since September, when we naturally started measuring it,” Jimmy Tata, head of credit and market risk at HDFC Bank told analysts on 16 January.