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Early updates for the June quarter from two private sector lenders showed that the second wave of the pandemic has had an adverse impact on loan growth.

India’s most valuable lender HDFC Bank reported a sequential drop in its retail loan disbursements while resurrected Yes Bank showed a contraction in its overall loan book.

In an early update on the June quarter, the bank reported 0.4% year-on-year contraction of its loan book. Recall that the first quarter of last fiscal year was hit hard by the nationwide lockdown. In short, the loan book didn’t grow despite a low base. Yes Bank reported a contraction of 30% in loans for the June quarter of last year. The restrictions on mobility and business during the second wave were less stringent than those during the nationwide lockdown. To be sure, most states in the country had imposed restrictions during the first quarter.

The impact on retail loans was visible. Yes Bank disbursed 5099 crore worth of retail loans in the June quarter against just 7828 crore it gave in the previous quarter.

The trend in retail borrowing has been subdued since the pandemic. Initially forced to curb spending due to lockdowns last year, the inclination to spend continues to be low although for different reasons. Indians are unwilling to spend due to the increased uncertainty over employment and income prospects after the second wave. The threat of a third wave and the impact of the pandemic on the health and psychology of people have dented consumption immensely. In this light, borrowing to consume has taken a backseat. Banks’ loan books are expected to reflect this in the June quarter. Analysts expect most banks to report a sequential fall in their loans due to the second wave. But unlike Yes Bank, most lenders are likely to report an expansion in their loan book from a year ago period simply because of the sharp contraction last year. For Yes Bank though even this optical relief has eluded.

Yes Bank’s balance sheet is yet to heal. After its collapse two years ago, the lender is trying to get back its depositors as well as grow its loan book. Yes Bank has fortified its capital but its pile of delinquent loans is still high and form 15% of its loan book. That said, analysts believe that most lenders may see loan growth drop sharply for the June quarter due to the pandemic.

The lender’s investors seem to be aware of these troubles. Shares of the bank are down more than 4% since April and valuation multiples continue to be depressed. The lender has a formidable challenge ahead—to grow its loan book amid a depressed consumption cycle.

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