Banks brace for loan defaults in the aftermath of Covid-19
MUMBAI: Indian banks, preparing for the worst from the coronavirus upheaval, are proactively setting aside large sums of money to cover future loan losses, sometimes more than regulatory requirements.
Banks are conducting internal tests to figure out the extent of damage, even before a central bank direction to do so. While some have put a number to the expected stress, others have declined to disclose it.
State-owned Canara Bank said it expects a 70-80 basis points (bps) hit on asset quality. In the private sector, HDFC Bank expects an impact of up to 50 bps in its small business loans, and IndusInd Bank predicts asset quality may worsen up to 80 bps. One basis point is one-hundredth of a percentage point.
Based on such estimates, banks have decided to make extra provisions for stressed loans, some of which are under moratorium. These are loans classified as special mention account (SMA-2) or where repayments are overdue between 61 and 90 days. The Reserve Bank of India had mandated a total provision of 10% for SMA-2 accounts under moratorium in two tranches in the March and June quarters. However, large lenders such as State Bank of India and Bank of Baroda have set aside 15-20% of such loans as provisions in the March quarter, pre-empting any future hit on asset quality.
RBI 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 nonperforming asset (NPA).
Rajnish Kumar, chairman, SBI, said on June 5 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 loans, all of which, Kumar said, is from retail segment. “In terms of 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,” said Kumar, adding SBI is well-placed to deal with any “unusual situation” and various scenarios.
Bank of Baroda 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 keeps a provision of 20% on all secured bad loans and chose to do the same on these loans. “These would have slipped into NPA category but for the standstill clause of RBI,” said Sanjiv Chadha, chief executive, Bank of Baroda.
Chadha said despite the fact that the bank expects stress to be elevated, particularly in the retail segment, on an aggregate basis, total slippages may not exceed what it was last year. In FY20 and FY19, total slippages stood at ₹18,665 crore and ₹20,334 crore, respectively.