Covid stress: Banks’ confidence that the regulations are good enough

Mumbai: Rising fundraising efficiency helped by a recovery in economic activity and benign initial requests for restructuring banks increasingly convinced that the delivery they carry on their books must be good enough to handle Covid-related stress.

Both private and public banks are convinced that stress in their books will not go out of hand at the end of fiscal policy as they have all increased their coverage ratio (PCR) to deal with increased stress. However, analysts say the real test for banks will come in the third and fourth quarters, as the Supreme Court’s stay in classifying NPAs will be lifted and there will be more clarity on requests for restructuring to banks.

ICICI Bank was the latest among lenders to express confidence in its level of preparation and asset quality following the positive outlook from peer RBL Bank, Axis Bank and IndusInd Bank. Even large public banks, Canara and the Bank of Baroda (BoB) expressed confidence that Covid-related stress will not get out of control.

“We have increased confidence that our guarantees and provisions made in March and June will be sufficient to mitigate losses due to Covid. We have not yet used the Rs 8772 crore intended for Covid,” he said. Sandeep Batra, President of ICICI Bank. Like its peers, the bank has also increased its coverage of NPAs to 81.5% in September 2020.

Previously, another large private sector bank, Axis, also expressed confidence that the commission they have built will be sufficient to cover losses. “We have now built a preparation buffer of 10,839 crore in addition to our PCR of 77%, which improved 243 basis points quarter on quarter. On an overall basis, our PCR is 124% of GNPA on September 20, 2020 against 76% in September 2019, “said CEO Amitabh Chaudhry that he would express confidence that the economy will gradually recover to the level before Covid.

Even smaller private sector banks just as RBL and IndusInd said that higher provisions and recovery in collections are signs that make them more and more confident of the future.

Vishwavir Ahuja, CEO of RBL Bank, said they have done enough in terms of Covid regulations and expressed confidence that the bank will be back to achieving business normality by the end of the fourth quarter of this fiscal policy.

IndusInd Bank CEO Sumant Kathpalia said he expects the bank’s restructuring book to be in “single digits”, although it intensified provisions to deal with any Covid-related uncertainties.

The bank increased total provisions to Rs 4,606 crore up from Rs 2381 crore a year ago including covid related provisions of Rs 2,155 crore, of which Rs 952 crore in the quarter. Higher provisions improved the provision coverage ratio to 77% in September 2020 from 67% in June and 50% in September 2019.

Analysts said banks in the private sector are gaining their confidence from the capital they raised last quarter. All four of the above banks created funds from investors to buffer their capital ratio.

“All these banks have capital adequacy in their high teens, so in that sense they have a strong buffer. But it’s still an unfolding situation because we do not know how deadly or harmless the virus may be in the future. There is no fear of a lockdown now, but the future is still uncertain with the onset of winter and of course, as the Supreme Court’s stay on the NPA rating is lifted, “said Lalitabh Srivastawa, an analyst at Sharekhan, part of BNP Paribas Group.

Two large public sector banks, which also declared results last week, also said the situation is better than expected. Both Canara and BoB recorded Tier I debt during the quarter as they also consolidated their balance sheets to deal with the Covid-related stress.

Higher collection efficiency and low restructuring requests leave the bank “room for cautious optimism,” Chadha said.

“We are also somewhat surprised by the construction of our book. The collection efficiency of the bank improved to 91% close to the 94% reported last year with loans that were under moratorium until August, reporting an 87% collection efficiency,” said Chadha.

Canara Bank’s CEO LV Prabhakar also said he does not expect any major shocks in the bank’s books as the total financial year is likely to be contained in £ 10,000.

But analysts say banks are putting an overly optimistic picture.

“We only know the effect of the restructuring in December or later. Whether the provisions made by banks to cover Covid are enough, we simply do not know now. Therefore, the third and fourth quarters are important to know how much of the loans under moratorium will slip and how much to write off, “said Siddharth Purohit, analyst at SMC Global Securities.