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India private-sector banks may need to up provisions as asset quality worsens

India's private-sector banks may need to set aside more cash in loan loss provisions for an expected deterioration in asset quality, weighing on their earnings over next few quarters as the economy slows due to the COVID-19 pandemic, analysts say.

Three of India's largest private-sector banks HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. all increased loan loss provisions for the quarter ended March 31 as they braced for the impact of the pandemic.

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The nonperforming loans of both private and state-owned banks will rise due to the economic challenges brought about by the disease, Krishnan Sitaraman, senior director at CRISIL, told S&P Global Market Intelligence in an email. CRISIL expects the Indian economy to shrink 5% in the fiscal year to March 2021, the first contraction in four decades.

"These provisions are currently, in a way, a front loading of the overall provisioning they would need for [nonperforming assets] by the end of the year," Sitaraman said. The bad loans are not expected to start appearing for some time due to the payment moratorium and standstill arrangements currently available on loans. Making the provisions earlier will help spread the impact on their profit and loss accounts, instead of taking very high provisioning hit toward the end of the fiscal year, he said.

India's central bank has allowed borrowers to delay repayments on their loans by six months, among a slew of measures to cushion the impact of the economic slump. The Reserve Bank of India has sought to increase liquidity and channel funds to sectors facing a cash crunch, apart from slashing interest rates to help boost economic growth. The government announced a 20 trillion rupee package to rescue the world's fifth-biggest economy as economic indicators signaled a slump.

Health matters

"Larger private-sector and public-sector banks will be relatively better placed to bear the COVID-19 impact as their capitalization levels, earnings positions and resources profile are better than the others," Sitaraman said.

Most of the larger private-sector banks also have greater flexibility to raise fresh capital if needed. The small and medium-sized private lenders will "need to ensure stability of their deposit base as some of them had faced challenges on this front in the last few months," Sitaraman said.

HDFC Bank, the biggest private-sector lender by assets, posted stronger-than-expected core pre-provisioning operating profit in the quarter that ended March 31. But its fiscal fourth-quarter stand-alone net profit fell to 69.28 billion Indian rupees from 74.16 billion rupees, according to an April 18 earnings report.

HDFC Bank's provisioning is "to take care of any events that may happen in future," said Sashidhar Jagdishan, the bank's then head of finance, in an April 18 earnings call. "What it shows is that we have enough buffer of credit reserve to be able to withstand this kind of a shock that probably we are anticipating that things will start to normalize sometime around May and June."

ICICI Bank also reported year-over-year increase in net profit for the fiscal fourth quarter. However, Axis Bank reported a loss of 13.88 billion rupees.

Effects may be staggered

The Indian economy is slowly returning to normal after a lockdown announced in late March. However, the impact of the government's measures to stem the fallout from the pandemic will likely continue to be felt by banks over the next few quarters.

"The countrywide lockdown and its resultant impact of a severe slowdown in the economy will be widespread and will take time to normalize ... it will get reflected in our numbers, too," Axis Bank CEO Amitabh Chaudhry said in an April 28 earnings call. The bank expects its fee income growth to slow and provisions to increase materially, he said.

Moody's expects Axis Bank's asset quality to deteriorate. While the bank had reported a decline in net new NPLs for the fiscal fourth quarter, there are indicators of an impending deterioration in asset quality such as the high migration of borrowers into lower-rated categories and a significant amount of customers availing of a moratorium of loan repayments.

"Even if a small portion of these loans become NPLs, it would represent a significant increase in NPL ratios from current levels," Moody's said in an April 30 note. Around 2% of the loans availing of the moratorium were already delinquent at the time it was granted, Moody's added.

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Overall, about 30% of the loans by private-sector banks are on moratorium, which borrowers can avail until Aug. 31, Jefferies said in a June 15 note. Small and medium-sized enterprises and retail have dominated the moratorium book, with relatively lower take-up from larger corporate borrowers, Jefferies said, adding it was "encouraging to note that lenders are now finding more comfort in borrowers' ability to pay and hence discouraging moratoriums."

The moratoriums should also not be seen as a benchmark for credit losses in the corporate segment as many borrowers have deferred payments purely for cash conservation, it said, adding that while unsecured retail loans may see higher credit losses, the stress may stay manageable in segments like housing and other secured loans.

As of June 16, US$1 was equivalent to 76.19 Indian rupees.