Banking disclosure: Playing Jekyll and Hyde: Some banks are not disclosing their overdue-loans data, and that is a worry – The Economic Times

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SynopsisThough the business between a customer and a bank is transactional, many customer-first banks like to treat it as a relationship. What happens when one partner in the relationship withholds critical information? It either leads to discord or a surprise. Which is why some private banks holding back data on non-NPA overdue loans is a cause for concern.

Two of India’s top private banks have stopped disclosing data on non-NPA (non-performing assets) overdue loans all of a sudden. Despite constant requests from analysts during the Q3 FY21 results conference calls of Axis Bank and HDFC Bank, the lenders blatantly declined to disclose data on loans that had remained unpaid 30 days past their due date. The banks had disclosed the relevant data for Q2 FY21.

This data and the financial disclosures are necessary, as users (primarily shareholders) of these statements need information about the banks’ financial position and performance, including the risk element and credit stance, to make financial decisions. They are interested in the bank’s liquidity and solvency and the risks related to the assets and liabilities on the balance sheet and the items outside it.

Of late, the issue of market discipline in the banking sector has drawn a lot of attention. Market discipline, however, works only if market participants have access to timely and reliable information, which enables them to assess the banks’ activities and the inherent risks.

To encourage market discipline and enhance the regime of transparency, the Reserve Bank of India (RBI) has over the years laid out a list of minimum disclosures, which allow market participants to assess key metrics on capital adequacy, risk exposure, risk-assessment process, and business parameters.

Banks were also encouraged to make more comprehensive disclosures over and above the minimum disclosures if they become significant and help in understanding the banks’ financial position and performance.

In the interest of full and complete disclosure, banks provide some useful information in their quarterly and annual financial statements.

Classification of loans
The RBI monitors banks’ standard loans and has set guidelines to classify them in three buckets — SMA0, SMA1, and SMA2 (SMA stands for special mention accounts), which comprise loans that are 0-30 days past due (DPD), 31-60 days past due, and 61-90 days past due, respectively.

An amount due under any credit facility is treated as ‘past due’ when it has not been paid within 30 days from the due date. Once it crosses the threshold of 90 days past due, it is classified as an NPA. Therefore, the 30-plus days past due is an important metric for investors to analyse the asset quality of the banks and serves as a benchmark for analysts to estimate future NPAs and incremental credit costs.

However, this information doesn’t come under the minimum disclosures mandated by the RBI. Yet, many banks disclose it for transparency.

Enter the loan moratorium
The beginning of FY21 was like no other. India and the world were struggling with the coronavirus and its ramifications. As a result, the RBI stepped in and declared a moratorium on loans to provide some relief to those struggling with liquidity. This decision brought a structural change in the banking sector, resulting in around 40% of private-bank loans coming under the moratorium.

As the moratorium ended on August 31, 2020, the 30-plus DPD would serve as an important indicator to determine banks’ asset quality, as past trends of credit costs may not reflect the curtailed economic activity in the pandemic’s wake.

Non-disclosure incidents
As Q3 FY21 results came in, Axis Bank and HDFC Bank stopped short of disclosing the 30-plus DPD. As the two banks had declared the same information for Q2 FY21, it was odd that they did not disclose it at this crucial juncture. The Axis Bank management’s explanation was that the disclosure in the previous quarter was specific to the RBI-instructed moratorium, which ended in August 2020.

No show-and-tell@2x

However, the other banks continued to voluntarily disclose the 30-plus DPD in their analyst presentation and conference calls. In these banks, the 30-plus DPD witnessed a significant increase in Q3 FY21 over the previous quarter. For instance, Yes Bank’s 30-plus DPD rose by 142% to INR16,278 crore. A similar trend was seen in the data shared by Federal Bank and Bank of Baroda, whose numbers jumped from 2.9% to 4.4% of their standard assets. Kotak Mahindra Bank, too, reported a significant jump of 392% to INR654 crore from the previous quarter in its SMA2 classification, although it chose not to disclose the SMA1 bucket.


The significant surge in the 30-plus DPD of these banks suggests that Axis Bank and HDFC Bank may also have witnessed a similar trend in the third quarter, because of which they decided to withhold this crucial information.

The bottom line
A rising delinquency rate is a grave concern and a 30-plus DPD is treated as an early indicator of further slippages and the need for future provisioning.

When banks choose not to disclose this crucial information, it raises a red flag and is often a sign of worry. The sudden spike of this metric indicates a bigger problem which needs immediate attention, as there can be cascading implications. Though these loans currently do not fall under the purview of NPAs, they are in default, which means the bank will need to hedge their position by provisioning or writing off these assets, leading to incremental credit costs.

Even though the disclosure is not mandatory, once a bank decides to provide the data for a certain quarter, it would be well-advised to continue doing so in the interest of transparency.

The sudden holding back of the data will fuel questions and lead people to draw concerning inferences. There would be a valid apprehension that the bank was reluctant to reveal a sharp deterioration in its asset quality, which led to the non-disclosure.

Overall, it doesn’t paint a bright picture of the banks’ current position. Prior to making voluntary disclosures, the management must take into account that releasing such information may no longer be discretionary in the future.

(Graphics by Sadhana Saxena)

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