Retail loans, long a safe bet for many banks, show uptick in defaults

HDFC Bank, ICICI Bank and Axis say bulk of the loans marked substandard in April-June was in retail category, but expect turnaround as lockdowns end.

Bank loans to individuals stayed healthy in the last decade when corporate defaults rose sharply, but as the coronavirus pandemic ravages the economy this retail category of lending is showing stress.

Private sector lenders ICICI Bank, HDFC Bank, Axis Bank and IndusInd Bank, in their April-June earnings, reported that the bulk of the loans marked as sub-standard asset was in the retail category. Many states imposed lockdowns in April-May to contain the spread of Covid-19, hurting loan repayment collections that led to slippages rising in retail.

ICICI Bank, India's second largest private sector lender, added Rs 7,231 crore gross non-performing assets (NPA) in the first quarter of this financial year compared to Rs 5,523 crore in the fourth quarter (January-March) of the previous financial year. Additions to gross NPA from the retail and business banking portfolios were Rs 6,773 crore in Q1 compared to Rs 4,355 crore on a pro forma basis in Q4 of 2020-21.

The retail and business banking gross NPA additions included Rs 961 crore from the kisan credit card portfolio and Rs 1,130 crore from the jewel loan portfolio (loans for the jewellery sector), ICICI Bank said. The two portfolios were about 3 per cent each of the bank's total loan portfolio on June 30, 2021. ICICI Bank's retail loan portfolio is 50 per cent of its total loan book. 

No moratorium this year

"The measures imposed by authorities in various parts of the country to contain the spread of the second wave of the pandemic had a significant impact on collections and recoveries in April and May," said Sandeep Bakshi, managing director (MD) and chief executive officer of (CEO) ICICI Bank in a post-earning conference call.

"Unlike last year, regulatory dispensations such as moratorium were not available to borrowers this time. This has led to an increase in overdues and gross NPA additions in Q1 of 2022 for the banking system, including us," Bakshi said, adding the jewel loan portfolio is secure and the bank expects near-complete recoveries in coming quarters.

"Fresh slippages are pre-dominantly from the Retail/Business Banking portfolio while Corporate/SME slippages were contained...It also witnessed some uptick in stress in the CV [commercial vehicle] portfolio," Motilal Oswal Securities said in a note on ICICI Bank's Q1 earnings. The note said the second wave disrupted collections, leading to "elevated slippages" in the retail and business-banking portfolio.

Axis Bank, the third largest private sector lender, reported Rs 6,518 crore of gross slippages into the sub-standard category in April-June: compared to Rs 5,285 crore as fresh slippages in Q4 of FY21. According to a report by ICICI Securities, Axis's slippages were dominated by retail loans (85 per cent).

"Retail stress--a mix of secured (55 per cent) as well as unsecured lending (45 per cent) --ran higher at 6.5 per cent. Lower set of retail restructuring at 0.2% could be the rationale for elevated retail slippages," said the ICICI Securities report.

Axis said collections fell in April-June as many of its employees and collection agents didn't step out to protect themselves from the coronavirus and there were lockdowns as well.

"We saw higher than expected retail slippages during the quarter but we believe it is transitory. We expect moderation in the second half of the financial year," said Amitabh Chaudhry, MD & CEO, Axis Bank.

Banks cite lockdowns

HDFC Bank, India's largest private sector lender, was perhaps the only lender unscratched in the NPA crisis of the decade, but Covid-19 created challenges for it as well. HDFC Bank's net interest income growth--at 9 per cent year-on-year—was a decadal low, which dragged earnings growth to 16 per cent as against past six-year average of 18-20 per cent.

Slippages of private banks in April-June quarter (as on 30 June, 2021)

Note: ICICI Bank's retail slippage includes business banking; IndusInd Bank's retail slippage include micro loans

Gross slippage (Rs cr)

Slippage from retail, as % of gross slippage

Gross NPA ratio(%)

ICICI Bank

7,231

93 5.15

Axis Bank

6,518

85 3.85 IndusInd Bank

2,762

85 2.88

Source: Bank/Analysts

HDFC Bank reported Rs 7,300 crore as fresh slippages overall in Q1, which was 2.54 per cent of total loans. 

"Management highlighted MSME delinquency trend has improved and incremental MSME NPAs are lower than the previous quarter. Also, corporate book is resilient. This suggests stress is primarily flowing from retail/agri segment," said ICICI Securities in a note on HDFC Bank.

HDFC Bank said the second wave of Covid-19 disrupted business activities in the country for close to two thirds of the April-June quarter, hurting loan collections and leading to a higher level of provisions.

IndusInd Bank, which has 56 per cent of its total loan from the retail segment, reported Rs 2,762 crore of slippages in the first quarter of this financial year. Of this among, Rs 2,342 crore came from the consumer loan book.

"Relatively higher risk loan book expectedly threw up elevated slippages, of which 38% emerged from the vehicle finance book, 24% from the microfinance book, 22% from other retail and the balance from corporate book," Yes Securities said on IndusInd earnings.

"Management stated that credit costs should be in the 160-190 bps range once the pandemic impact recedes," the report added.

Sumant Kathpalia, IndusInd's MD and CEO, said collections had picked up in June and the bank expects normalcy by September.

"There was a NPA movement in the quarter and in June collections also happened. There was Rs 2372 crore of deductions [write-offs, recovery and upgrade]," he said.

"On the credit card, I think it is the lowest priority for the customer to pay the bill. People will first pay their home loan instalment, then auto loan and then card. You will see normalization of the card delinquency as we move forward." 

Banks said collections dipped and led to higher slippages due to the lockdown in April and May, but they expect asset quality in retail portfolio to improve once normalcy returns--hoping the rise in bad loans is temporary and not a structural problem.