Tag: asset quality

Gold loans: A place to be in, for banks

Banking & Finance

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Gold loans stood out in banks’ loan portfolio in the first nine months of the current financial year, both in terms of growth and asset quality.

Banks aggressively expanded their loan against pledge of gold ornaments and jewellery (jewel loans) portfolio in the wake of the Covid-19 pandemic.

Gold loans shine as small businesses, borrowers look for ready cash

During the first nine months of FY2021, banks preferred to lend either against highly liquid collateral such as gold or Government guarantee as they feared the economic downturn would affect customers’ ability to repay loans.

State Bank of India’s (SBI) personal gold loan book jumped four times in six months (up to December-end 2020) to stand at ₹17,492 crore.

Mobile app for gold loan launched in Kochi

Gross non-performing assets (GNPAs) of India’s largest bank was only at 0.04 per cent of its gold loan portfolio, per the bank’s analyst presentation. The bank, however, did not disclose the size of its agriculture gold loan in the presentation.

Bank of Baroda’s (BoB) agriculture gold loan portfolio was up 29 per cent year-on-year (yoy) to ₹21,116 crore as at December-end 2020 (₹16,325 crore as at December-end 2019).

“When we look at the agriculture side, nearly 40 per cent of the growth that we see in agriculture has come from gold loans. Gold loans are 20-21 per cent of our total agriculture book.

“…And we do hope that going ahead, 40-50 per cent of agricultural growth will come from gold loans,” Sanjiv Chadha, MD & CEO, BoB, told analysts last month.

Risk-averse market

The gold loan portfolio of Thrissur (Kerala) headquartered CSB Bank jumped about 60 per cent yoy to ₹5,644 crore as at December-end 2020 (₹3,523 crore).

Gold loans accounted for 40 per cent of the private sector bank’s total advances against 30 per cent in the year-ago quarter.

“We will not slow down the gold loan growth. We will increase the growth of the other products so that as a proportion (of total advances), gold loan will go down. I think, this (gold loan portfolio) is only about ₹6,000 crore. There is a big public sector bank, which has ₹70,000 crore of gold loans, so gold loan is a place to be in today,” C VR Rajendran, MD & CEO, CSB Bank, told analysts last month.

Federal Bank’s gold loan portfolio registered a y-o-y growth of 67 per cent and crossed ₹14,000 crore in the third quarter of FY2021, per its third quarter analyst presentation.

The proportion of gold loans in total advances in the case of Karur Vysya Bank (KVB) increased to 23 per cent as at December-end 2020 as against 17 per cent as at December-end 2019.

As at December-end 2020, KVB’s gold loan portfolio stood at ₹12,069 crore (₹8,580 crore)

Karthik Srinivasan, Group Head — Financial Sector Ratings, ICRA, observed that gold prices have been going up and this has been providing comfort to both lenders and borrowers.

“The market is still risk-averse. And banks, especially public sector banks, have been offering gold loans at relatively finer rates. So, that is an option that many people are availing,” he said.

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NPA risks easing for largest PSU banks but shortage of funds could hit credit growth

Banking & Finance

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State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India, have all reported an improvement in their asset quality in the first nine months of the current fiscal year.

Risk of a sharp deterioration in the asset quality of five of the largest PSU banks now seems to be abating with the economic recovery picking up pace, said Moody’s Investors Service in a recent note. However, despite this, the rating agency cautioned that such public sector lenders are likely to remain starved of sufficient capital to absorb unexpected shocks and support credit growth. Banks were expected to see a sharp rise in NPAs last year when the pandemic slowed the Indian economy down but despite the economic slump, the asset quality of banks has seen mild improvement.

Risks reducing for banks

State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, and Union Bank of India, have all reported an improvement in their asset quality in the first nine months of the current fiscal year. “The gross NPL ratios of the five banks declined by an average of around 100 basis point as of the end of 2020 from a year earlier,” Moody’s said. The estimates even account for loans that have not yet been declared NPAs owing to the Supreme Court order. Lenders are also drawing comfort from the provisions made by them against the expected jump in NPAs.

During the pandemic, various measures were undertaken to support borrowers. This, according to Moody’s has largely helped limited impact of the pandemic on the banks’ asset quality. These measures included loan repayment moratorium, loan restructuring, monetary easing, liquidity infusion, Capital infusion into public sector banks, lowering LCR, among others. “As of the end of December 2020, the five banks restructured 0.7%-2.6% of gross loans, less than our expectations, as the impact of the pandemic on borrowers was not as severe as we had anticipated,” the report said.

Dearth of capital to result in uneven recovery

Despite the green shoots, capital shortage remains a risk. “The banks will continue to face shortages of capital to both absorb any unexpected stress and support credit growth, with high credit costs continuing to suppress profitability,” they added. This shortage in the capital could result in an uneven recovery for the Indian economy with various vulnerable industries facing a setback. The banks’ asset quality can also deteriorate more than anticipated, with exposures to the MSMEs, in particular, posing risks, Moody’s said.

The government planned to infuse Rs 20,000 crore into public sector banks this fiscal year and another Rs 20,000 in the next financial year. While the capital infusions will help the banks meet Basel capital requirements, it will not boost credit growth, according to the report. This would result in some banks turning to the market. Canara Bank and PNB have already raised some capital from equity markets.

On the other hand, in an earlier note, Moody’s said that private sector banks have raised sufficient capital buffers to tide through any hiccups going forward. Asset quality of private lenders remains supported by the same measures that have aided their public sector peers.

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RBI, BFSI News, ET BFSI

Personal Finance

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India’s financial sector should brace for challenging times ahead with an increased risk of deterioration in asset quality and lower demand for loans, the Reserve Bank of India (RBI) said in a report on Tuesday.

The central bank has introduced various measures to support the banking sector including a relaxation in recognition and provisions for bad loans to protect lenders and creditors during the coronavirus pandemic.

The roll back of these measures could now hit the books of banks.

“The challenge is to rewind various relaxations in a timely manner, reining in loan impairment and adequate capital infusion for a healthy banking sector,” the central bank said it in its annual report on Trends and Progress of Banking in India.

Non-banking financial companies (NBFCs) or shadow banks may see a hit on their profitability going forward due to asset quality concerns, lower credit demand and the tendency to preserve cash, the report said.

Toxic loans on the books of Indian banks have eased with gross bad loan ratios falling to 7.5% at the end of September 2020 from 9.1% in March, but it said that going forward such loans could rise again following relaxations being lifted.

The six-month loan moratorium on repayments provided by central banks and the supreme court judgment prohibiting recognition of bad loans since September may have also provided some respite to the banks on asset quality.

Concerns still remain on non-performing assets, particularly on credit card loans which does not augur well for the risk-profile of Indian banks.

“Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply going forward,” the RBI said.

The report also said Indian banks had written-off loans worth 2.38 trillion rupees ($32.46 billion) in the financial year 2020 that ended on March 31.

The overall outlook for the Indian economy in 2021 continues to remain uncertain, the report said.

“The high debt overhang of households, non-financial corporates and the (national and sub-national) governments remains a serious concern,” the central bank said.

($1 = 73.3270 Indian rupees) (Reporting by Nupur Anand and Aftab Ahmed; Editing by David Evans)



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Given uncertainty induced by Covid-19 and its real economic impact, asset quality set to worsen sharply: RBI

Banking & Finance

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Fresh slippages remained the highest among PSBs.

Reserve Bank of India (RBI) on Tuesday cautioned the modest bad loan ratio of 7.5% at end-September 2020 end “veils the strong undercurrent of slippage” warning of a sharp decline in asset quality. The central bank pointed out the financial performance of the banking sector in H1FY21 had been shored up by the moratorium and the standstill in asset classification. “Going forward, although the risks to the banking sector remain tilted upwards, much hinges around the pace and spread of the economic recovery that is gradually gaining traction in H2: 2020:21,” RBI noted.

The accretion to NPAs, as per the RBI’s income recognition and asset classification (IRAC) norms, would have been higher in the absence of the asset quality standstill provided as a Covid-19 relief measure. “Given the uncertainty induced by Covid-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” it said.

The moderation in the gross non performing asset (GNPA) ratio, which started after the peak in March 2018, continued through FY20 and FY21 so far, to reach 7.5% by end-September 2020. The improvement was driven by lower slippages which declined to 0.74% in September 2020 and resolution of a few large accounts through the Insolvency and Bankruptcy Code (IBC).

Fresh slippages remained the highest among PSBs.

Going forward, with gradual rollback of policy measures, deterioration in asset quality may pose challenges, although build-up of buffers like Covid-19 provisions and capital raising from market may help alleviate the stress, the central bank observed.

After a gap of two consecutive years, the loan growth at SCBs decelerated in 2019-20, reflecting both risk aversion and tepid demand. During the current financial year so far, this was accentuated by the Covid-19 pandemic.

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Moratorium, loan recoveries help Indian banks improve GNPA ratio, but will it sustain?

Personal Finance

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While the overall lending rates have declined when we look at the headline rates, the transmission is probably slower when we look at various products or risk segments.

India’s banking sector saw its gross non-performing assets (GNPA) come down in the second quarter of this fiscal year. The GNPA ratio of SCBs improved to 7.7% in the quarter ended September against 9.3% in the year-ago period, CARE Ratings said in a report. Although the asset quality of the banks seems to be better, the improvement has come owing to the moratorium offered by the Reserve Bank of India (RBI), recoveries and higher write-offs made by multiple banks. “As per disclosures by banks, the Gross NPAs would have been around 0.5% to 0.6% higher had these (moratorium) accounts been classified as NPAs,” the report said.

Asset quality improves

Among state-owned banks, India’s largest lender State Bank of India (SBI) reported the highest asset quality improvement, with a decline in GNPA ratio to 5.3% in the second quarter of this fiscal year against 7.2% a year ago. SBI accounts for nearly 20% of public sector bank GNPAs. Punjab National Bank (PNB) reported GNPAs at 13.4% against 16.8% a year ago. “Net NPAs also shrank to Rs 2.1 lakh crores in Q2FY21 from Rs 4.5 lakh crores in Q2FY19 reflecting an increase in provision coverage ratio (PCR),” CARE Ratings said. 

Recoveries were better in the fiscal second quarter, helping in improving the asset quality of banks. SBI’s recoveries stood at Rs 4,038 crore, ICICI Bank was at Rs 1,945 crore, followed by Bank of Baroda with Rs 1,642 crore worth of recoveries. “On an overall basis PSBs accounting for 75% share of GNPAs of SCBs have experienced a drop in the GNPA ratio to 9.3% in the quarter ended September against 11.6% in the year-ago period,” the report highlighted. 

Skeletons to be unearthed ahead?

CARE Ratings said that now that the moratorium offered by the banks has been lifted, the after-effect and the impact on the banks’ balance sheets may be witnessed in the latter part of the year and subsequent period. Banks have been ordered to not declare covid-19 related defaults as NPAs until further notice, hence keeping the GNPA ratio lower. However, following this many banks have kept aside extra provisioning for NPAs that may arise in future, making higher provisions in September. 

The report said that in the coming quarters provisions of SCBs are likely to remain elevated on account of the recognition of stressed assets owing to Covid-19 and its disruptions affecting the businesses which could impact the financial performance.

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