In November 2020, we at marketfeed talked of an NPA or Non-Performing Asset time bomb which might go off around this time, sending banks into a pool of bad quarterly results. You can check out the article over here.

During the first wave of COVID-19, when businesses took a hit, the Supreme Court had asked banks all across India to give a stay or moratorium to all those who had borrowed money from them. Whenever someone does not repay their loans on time, banks are required to set aside some money or ‘provision’ as a precaution so that the banks do not go bust in case of an unexpected event. The ‘provision’ money comes right off a bank’s profits, which impacts the profit and loss statement of a bank. RBI had asked the banks to set aside 10% provision for all loans that came under a moratorium which shaved off a few thousand crores in profits last year. However, the provisions were necessary to save banks from greater damage. 

RBI asked banks to set aside provisions only for the amount under restructuring or moratorium and not on those which did not fall under these, this helped protect banks from higher provisioning The overdue loans which were not classified as NPA before would now be classified all at once which could severely impact the banks’ balance sheet. This sudden classification of NPAs is what the whole NPA bomb scare was all about. 

Fast forward to May 2021, all major banks have started coming up with their Q4 results. Interestingly enough, banks like HDFC, ICICI, Axis Bank, IndusInd Bank, AU Small Finance Bank, Equitas Small Finance Bank, and others have posted some really good profit growth for the quarter. A lot of public and private sector bank results that are due this month can go on the same lines. So did we miss out on something? Did the bomb not burst? What are the banks headed for? Let us find out. 

Bank Results Outlook For Q4

  • Good Profits: For Q4FY21, banks have posted fairly good revenue growth and profits. These good numbers were mostly because of High Net Interest Income(NII) and decreased provisions. HDFC Bank posted YoY profit growth of 15.8%. Axis Bank went from a loss of ~Rs  1262 crore to a profit of  ~Rs 2941 crore. State-owned Bank of Maharashtra recorded yearly profit growth of ~214%, and IndusInd Bank recorded yearly profit growth of 193.76 crores. AU Small Finance Bank and Equitas Small Finance Bank both recorded YoY profit growth of ~38% and ~162.8% respectively. 
  • Increase In Deposits: Deposits in banks grew fairly well in the fourth quarter of FY21.  For ICICI Bank the total deposits rose 21% YoY. Deposits in HDFC Bank grew ~16% YoY. For Axis Bank deposits grew by ~10% YoY. For AU Small Finance Bank deposits increased by 37.5% YoY and 52% YoY for Equitas Small Finance Bank. According to an RBI report, total bank deposits increased by ~11.4% in the financial year ending March 31, 2021. 
  • Bad Debt Position Improved: According to credit rating agency CARE, gross NPAs declined from 8 Lakh crore in December 2021 to 7.5 lakh crore in March 2021. The gross NPAs of Scheduled-Commercial Banks, in particular, declined by 2.3% over a year’s time. The bad debt position improvement is also accredited to recoveries that the banks made. According to Care Ratings, banks made the following recoveries in Q4: SBI Bank: Rs  5,657 crore, ICICI Bank: Rs 1,776 crore, Union Bank of India: Rs 1,554 crore, Bank of India: Rs 1,495 crore, Bank of Baroda: Rs 1,471 crore, Canara Bank: Rs 890 crore, Indian Bank: Rs 744 crore, Central Bank of India: Rs 631 crore and Axis Bank: Rs  621 crore
  • Loan Advances Increased: According to RBI, loan advances rose by ~7.2% over a year. HDFC Bank’s advances grew 14% YoY. Axis Bank’s advances grew 15%. AU Bank’s Net Advances were up ~28%. 

Why Banks Performed Well

Aggressive Fundraising Via QIP and NCDs

After the pandemic struck, banks were assigned with safeguarding their position. They had increased their provisions to fight off bad debt but impacted their profit. They needed money to boost their lending and increase bank credit. Banks started aggressively raising funds by selling Non-Convertible Debentures(NCDs) or the sale of equity shares. 

In August last year, HDFC Bank raised Rs 14,000 crore through a combination of NCDs and Qualified Institutional Placement(QIP), ICICI raised Rs 10,000 crores through QIP, and Axis Bank raised Rs 10,000 crore via QIP. In November 2020, RBL Bank raised Rs 1566 crore. In December 2020, IDBI raised Rs 1435 through QIP, Canara Bank raised Rs 2000 crore through QIP.  The list goes long.  Banks now had leverage and could focus on normalizing banking operations. The aggressive raising of funds helped mitigate the effect of increased provisioning, banks could now focus on lending.

Decreasing NPAs and Provisions 

Banks started decreasing provisions plus their Net Interest Income and Gross Advances increased. Since there was an economic stimulus, businesses had started to flourish and employment levels went to normalcy. The asset quality of banks increased due to low slippage. Slippage = New NPA. However, the asset quality might go down for banks in Q1FY22, where Gross NPAs or bad loans might go up.

Banks Wrote-off Huge Overdue Loans

When a bank has enough provision for an NPA when it is overdue for three years, the bank can write off the bad loan. What this does is that it removes bad loans from the company’s accounts and improves the company’s balance sheet. It improves the company’s NPA ratio and the company can reduce the provisions which in turn improves its profits. As of March 31, 2020, banks have written-    off loans worth 1.15 lakh crores in the first three quarters of the previous financial year. In fact, Indian banks have written off 8 lakh crores worth of bad debt in the past decade. Once you write off a loan, it ceases to exist, it doesn’t matter. This could be another major reason why the NPA time bomb couldn’t tick off. 

Update: RBI Governor Shaktikanta Das’s Announcements

RBI Governor Shaktikanta Das made an uninformed announcement on May 5, 2021. In the speech, he announced some key reforms that will again benefit banks, micro, small and medium enterprises(MSMEs), pharma companies, vaccine makers, drug manufacturers, medical oxygen suppliers, and other essential health services. He also announced some provisions to financially assist state governments in times of pandemic. These reforms have now allowed banks to restructure more loans. They have also announced measures to selectively induce liquidity into the markets that have to an extent safe guarded banks from the devastating second wave of COVID-19. We have talked in detail about Shaktikanta Das’s Speech at marketfeed. To know more, click here.

A lot of loans are still under restructuring by banks. This has simply delayed the NPA spike that was expected. Banks raising funds through QIPs and NCDs did safeguard them. However, the second wave of the coronavirus will amplify the magnitude of the NPA crisis. The first quarter of FY22 doesn’t seem too bright for the banks. Shortage of Medical Oxygen, COVID-19 drugs, and vaccines has acted as a barrier to economic revival. Can a situation similar to last year occur again for banks? Or could it be worse than that? Is there something that we are not able to see? Let us know in the comment section in the marketfeed App.