MUMBAI: Banks are expected to post a flat or lower level of non-performing assets (NPAs) in the quarter ended September 2020. This is a result of the Supreme Court’s decision staying banks from classifying Covid-related defaults as non-performing until further orders. However, most banks are expected to set aside funds in the form of extra provisioning for potential NPAs that may come up in future.
HDFC Bank, the only major lender to have reported its results for Q2 FY21, said that its gross and net NPAs shrunk to 1.08% and 0.17% from 1.36% and 0.33% in Q1 FY20. “However, had the bank recognised NPAs after August 31, in the absence of the SC directive, gross and net NPAs would have been 1.37% and 0.35%. The bank made contingent provisions of Rs 2,300 crore, which include Rs 1,130 crore for specific accounts, taking total contingency provisions to Rs 4,000 crore. All provisions currently total about 2.2% of loans,” said Santanu Chakrabarti of Edelweiss Research in a note.
Despite many businesses seeing their top lines shrink during the first half due to the lockdown, banks have only reported an improvement in their asset quality so far. This is because the Reserve Bank of India (RBI) allowed all borrowers to avoid paying their loan instalments for six months up to end-August.
Loans under moratorium would not have in any case been classified as NPAs for the quarter ended September as an account has to be 90 days overdue before banks classify it as non-performing. The Supreme Court order had the impact of sparing other borderline cases that would have been classified as NPAs this quarter.
“From September, there was no official moratorium from the RBI, but there was a court directive against classifying Covid-period defaults as NPAs. So, banks are complying with court guidelines. Banks are prudentially making provisions based on their estimates,” said Rajkiran Rai, chairman of Union Bank of India and newly appointed chairman of the Indian Banks’ Association.
Another private lender which announced its results, Federal Bank, also reported a shrinking of NPAs. According to a note by Motilal Oswal, the bank’s management said that if the Supreme Court had not temporarily halted NPA recognition, slippages would have stood at Rs 237 crore.