Synopsis–Recent curfews have prompted lenders to conduct stress tests yet again on their portfolios after collection ratios fell up to 10 per cent in the first fortnight of April. Business could be down about a fifth, and the situation might worsen further before a turnaround is possible.
MUMBAI: Asset quality at Indian banks is under the lens yet again as the second Covid surge and widespread curbs on mobility and businesses put a question mark on the ability of the borrowers to repay.
Recent curfews have prompted lenders to conduct stress tests yet again on their portfolios after collection ratios fell up to 10 per cent in the first fortnight of April. Business could be down about a fifth, and the situation might worsen further before a turnaround is possible. During the first Covid wave last year, the Reserve Bank of India (RBI) had asked banks to conduct detailed stress tests to assess the impact of the pandemic on their books and raise capital to build shock buffers. This time around, banks are taking these measures proactively to gauge potential risks.
“Based on the current situation, should a financial impact manifest, we are currently in the process of finalising various stress tests that we have already completed,” said Jimmy Tata, chief credit officer, HDFC Bank. “I do not want to put those results out just now because they might be unnecessarily over-conservative, as they were when we did them the last time. We had to actually revise the stress test numbers.”
ICICI Bank has also carried out similar tests and is comfortable with the results. “We did a stress test with more intensity last year; we have been doing it and are comfortable with the results, the quality of our book and the underwriting we have done,” said Sandeep Batra, executive director, ICICI Bank.
These stress tests mainly take into account the impact on capital positions, asset quality and profitability with three scenarios; baseline, medium, and severe. Lenders saw collections drop between 5 and 10 per cent as lockdowns in key states took a toll on businesses. The worst affected have been the micro and small enterprises, micro-finance and the commercial vehicles (CV) segments, where collection efficiencies dropped rapidly.
“The second wave has brought back the old questions around asset quality, asset classification and the good book or bad book for banks and NBFCs,” said Ritesh Sanyal of Deloitte India. “The degree of uncertainty would mean that many banks will have to evaluate the recoverability of assets and conduct stress tests on the assets based on the sector or geography.”
India reported more than 3.49 lakh fresh Covid infections cases on Sunday, forcing several states to impose strict lockdowns and curfews. As per a report by Emkay Global, the first fortnight of April 2021 has been weak in terms of business activity, which is down about a fifth across various segments due to fewer working days and strict curbs on mobility. This is expected to fall further with stricter enforcement of localised lockdowns.
On the macro front, several high-frequency indicators pointed to a further slowdown in growth momentum. Headline retail inflation inched up further to 5.5 per cent in March, while industrial recovery remained lacklustre, with the index of industrial production (IIP) declining 3.6 per cent, the February print showed.
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