MUMBAI: Indian banks are bracing for the worst, setting aside substantial sums of money, occasionally more than regulations warrant, to provision for potential losses on loans because of the pandemic and the ensuing lockdown.
Even before the Reserve Bank of India (RBI) directed lenders to conduct stress tests, banks have been conducting internal tests to figure out the extent of the damage. While some have put a number to the expected stress, others have declined to disclose it.
For instance, state-owned Canara Bank expects a 70-80 basis point (bps) hit on asset quality. HDFC Bank has said its portfolio could see up to a 50-bps impact from probable stress in small business loans, while IndusInd Bank expects its asset quality to deteriorate by a maximum of 80 bps as a result of coronavirus crisis.
On the basis of such forecasts, banks have decided to make extra provisions for stressed loans under moratorium. These are loans classified as special mention account (SMA-2) or where repayments are overdue between 61-90 days. The Reserve Bank of India (RBI) had mandated a total provision of 10% in two tranches in the March and June quarter.
Large lenders like State Bank of India (SBI) and Bank of Baroda (BoB) had, in fact, set aside 15-20% of such loans as provisions in the March quarter, pre-empting any future hit on asset quality.
The central bank had allowed lenders to maintain standstill on asset classification during the moratorium period and banks have used this for loans that would have otherwise slipped into non-performing asset (NPA).
Rajnish Kumar, chairman, SBI, on 5 June said the bank has treated some of the more-stressed loans under moratorium as bad loans and set aside 15% as provisions. This was applicable to ₹6,250 crore of loans, all of which, Kumar said, is from the retail segment. "In terms of the provisions on this piece, we have not taken the RBI dispensation but have provided 15%, treating it as a fresh slippage and also provided for an interest reversal of ₹250 crore," Kumar had said, adding that the bank is well placed to deal with any "unusual situation" and various scenarios.
Bank of Baroda, another large public sector lender with ₹6.9 trillion in assets, set aside 20% provisions on moratorium loans worth ₹4,053 crore, against RBI’s requirement of 5% in Q4 FY20. The bank said it typically provides for 20% on all secured bad loans and chose to apply this prudence on these loans as well. "These loans would have slipped into non-performing asset (NPA) category but for the standstill clause of RBI," said Sanjiv Chadha, chief executive, BoB.
Chadha said despite the fact that the bank expects elevated stress, particularly in the retail segment, on an aggregate basis, total slippages may not exceed last year's level. In FY20 and FY19, the bank’s total slippages stood at ₹18,665 crore and ₹20,334 crore, respectively.
Analysts have drawn parallel to the 2008 financial crisis to project the extent of covid-19 impact on banks.
Analysts at Jefferies India Pvt Ltd referred to SBI's experience during 2008-13 when RBI had allowed a special restructuring and said SBI saw about 3% of loans seek restructuring and over the next 3-4 years, nearly 30-35% of these loans turned bad.
“However, such high extent of slippage may not happen now as many borrowers have taken moratorium purely for cash conservation. We also expect RBI to offer a restructuring package that will allow the borrowers to normalise businesses before resuming full repayment," the Jefferies note said on 15 June.