For India’s big banks, stress has not left the building yet


MUMBAI: A look at the December quarter profitability metrics of India’s large banks may give the impression that lenders have left behind their bad loan troubles and are all set to boost returns for their investors. After all, every lender has been setting aside large chunks of profit as provisioning over the past nine months which is expected to take care of any pandemic related stress. This makes the Nifty Bank index’s 12% gain of the past one month justified.

But here is a small detail that investors need to focus on. Fresh slippages in the December quarter have shown a sequential jump. The top ten lenders, by size of their loan book, added close to 80,000 in slippages during the December quarter. These are not captured in banks’ reported balance sheets because lenders cannot label a defaulting account as non-performing. That is because the Supreme Court has ordered a standstill on asset recognition until it passes judgement on the compound interest case. But lenders reported the actual bad loan picture by excluding the benefit from the judicial standstill in a post-it to their earnings release in both quarters.

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What do the elevated slippages in December quarter tell us? Clearly, stress has increased. Considering that large corporate loans are not the main contributors to slippages this time around, headline asset quality numbers show improvement. Nevertheless, investors need to monitor these new areas from where slippages are originating. The source of the stress now is retail and small businesses.

What’s more is that close to Rs1 trillion worth of loans were restructured too. In other words, these borrowers needed easier repayment terms on their loans owing to stress. Granted, the pandemic has necessitated restructuring. But it cannot be denied that stress has only piled on.

Analysts are pointing out that lenders have made enough provisioning against restructured loans and even fresh slippages. In essence, banks’ balance sheets are covered against risks. Ergo, earnings estimates have been hiked for most banks by analysts. The test of these upgrades would come up in the ensuing quarters. Whether banks would report an improvement in slippages from retail and small businesses will determine whether investors continue to love their shares.

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