FARM LOAN WAIVERS POSE A THREAT TO ASSET QUALITY

HDFC Bank, IndusInd Bank and RBL Bank’s Q1 show suggests more pain ahead from agri loans

When India’s top-rated bank known for its enviable asset quality reports higher non-performing assets (NPA) and from its agriculture loans portfolio at that, certainly not all is fine in the banking system.

Paresh Sukthankar, deputy managing director, HDFC Bank, said that about 60 per cent of the NPAs recognised in Q1 or the June 2017 quarter were agricultural loans because the repayment discipline of some customers deteriorated due to farm loan waivers announced by state governments.

The pain could last for another quarter because recovery depends on customer attitudes towards repayment. HDFC Bank isn’t alone facing challenges on agriculture loans.

For RBL Bank, about ~101 crore of NPAs came from MFI (micro finance institutions) lending, thus taking its gross NPA ratio to 1.46 per cent in Q1 from 1.13 per cent a year ago. IndusInd Bank’s MFI book recognised about ~31 crore of NPAs, of which ~28 crore was provided for in Q1. Another ~50 crore of the portfolio is at risk, according to the bank, and hence it expects to make a provision of ~10 crore in Q2. Some of these figures might not be alarming, but clearly the impact of the farm loan waiver is beyond just dampening sentiment, which most analysts believed would have been the case. “The farm loan waiver announced in several states affected recoveries as many farmers stopped paying money (to lenders such as banks, MFIs). We believe the willingness to repay is a far bigger issue than the ability to repay,” says Suresh Ganapathy of Macquarie Capital.

However, if the event is hurting private banks, public sector banks, which hold 4850 per cent of farm loans of the banking sector, may be more vulnerable. Another category, despite its timely efforts to pacify investor concerns, but looks highly vulnerable given the current trend, is that of MFIs.

But the entire portfolio is not at risk. “Part of the agri exposure, which is secured by assets, may be safe, while only the unsecured business, which includes MFI loans, is at risk,” Siddharth Purohit of Angel Broking explains.

Agri loans such as those given for tractors and farm equipment are backed by the underlying asset, while even crop loans, after the 2008 farm loan waiver debacle, are backed by mortgage, mostly gold. Therefore, the risk on crop loans is also not too high. Nonetheless, as Ganapathy points out, the willingness to repay is a far bigger issue, and hence the street will keep an eye out on the trends hereon.

MFI sector loans are unsecured. Therefore, Bharat Financial (results expected on Wednesday), Ujjivan Financial Services, and Equitas Holdings may be prone to yet another quarter of asset quality issues. Also, if IndusInd Bank’s performance, which witnessed no loan growth in this segment during Q1, is extrapolated, it points at a bleak loan growth for MFIs too.

The question is how long the pain would last. While MFIs may take longer to recuperate, most private banks have a direct or indirect exposure to the MFI segment. Further deterioration could hurt the premium stock valuations they command due to strong asset quality. For public sector banks, the street isn’t pricing in asset quality concerns from the agri book just yet. However, if fresh worms emerge, that could dampen the sentiment, which is just about turning positive, for larger banks such as State Bank of India, Punjab National Bank, Bank of Baroda and, Canara Bank.