Lenders build provision buffers to counter future asset slippages

A visitor watches an Axis Bank's advertisement at its corporate headquarters in Mumbai, July 25, 2017. REUTERS/Danish Siddiqui/Files

MUMBAI : Private sector lenders are using the covid-19 pandemic to build a war chest of provisions that would come handy in cushioning against future asset slippages.

Axis Bank has pegged its covid-19 provisions at 3,000 crore, while ICICI Bank said it has set aside 2,725 crore in the March quarter and HDFC Bank has made additional provisions of 1,550 crore.

The Reserve Bank of India (RBI) has asked banks to set aside 10% of those outstanding loans for which a three-month moratorium on repayments was provided. This has to be done in two tranches of 5% each in the March and June quarters.

HDFC Bank has created a good credit buffer to be able to withstand a shock, anticipating that things will start to normalize around May or June, said Sashidhar Jagdishan, head of finance at the lender.

“In case it gets prolonged even beyond, whether it is unsecured, whether it’s secured retail, whether it’s small and medium enterprise (SME), whether it’s corporate, I think we have done enough provisioning to take care of any event that may happen in the future,” Jagdishan told analysts on 18 April.

The directive of 10% provisions on accounts under the moratorium is likely to increase the credit provisions for the banks, said rating agency Icra.

Provisioning requirements of banks can rise by 30,000-40,000 crore, with an estimate of 3-4% of the total bank credit being in the overdue category, which requires a provision of only 0.4%.

However, not all banks are confident about the economic situation and would like to wait to assess the full impact of the pandemic.

Axis Bank has done internal stress tests on the resilience of its book based on various scenarios, said its chief executive Amitabh Chaudhry. However, it is difficult to predict which of those scenarios will play out, he said.

“What we know is that when we look out of our window, economic activity has come to a halt. As the lockdown continues, there is absolutely no doubt that we will see stress build up in the system across both the wholesale and individual customers. So, as we stand today, we believe that it is important for us to do the right thing, which was to take some kind of prudent provisions,” Chaudhry told analysts on 28 April.

source: livemint