Retail Credit Push in for a litmus test

 

RETAIL CREDIT PUSH IN FOR A LITMUS TEST

RBL Bank under closer scrutiny of RBI: On 24th December 2021, Reserve Bank of India (RBI) appointed its Chief General Manager Shri Yogesh K. Dayal as additional Director in RBL Bank’s (bank) Board. A day after, the bank’s board accepted the request of MD & CEO Shri Vishwavir Ahuja to proceed on leave with immediate effect (His term was to originally end in June 2022). It also approved the appointment of Shri Rajeev Ahuja, ED as the interim MD & CEO, which had the consent of RBI with a caveat that it shall be for three months effective 25th December 2021. To reduce the impact of the above developments on the bank's business and address any concerns among investors and depositors, the bank as well as the regulator issued clarifications. Both  emphasised that the bank’s financial records are satisfactory and the investing/depositing public need not have any concern on this score.

Reasons for comfort: RBI said the bank has a comfortable CAR of 16.33% and a LCR of 153% as against regulatory requirement of 100%. It added that the appointment of additional director is undertaken under section 36AB of BR Act so as to extend closer support to the bank's board in regulatory/supervisory matters. The bank on its part, added that its NNPA ratio is stable at 2.14%.Notwithstanding the assurances, it is seen that the bank’s share slid from Rs.170 levels to around Rs.140 levels and the bank’s total deposits showed a decline of Rs.1951 cr. as on December 2021 over its previous quarter.

Financials of RBL Bank: While the statements from the regulator and the bank appear to be statement of facts, derived from the bank's financials for the quarter ended 30^th September 2021, it is also true that the bank’s loan assets are under stress now and then. Ever since its listing in 2016, consequent to raising of equity by way of IPO, the bank grew its advance books at a pace of 30-35% per annum in the period April 2016 to March 2020. It hit a road block in the quarter ended 30^th September 2019, when its net profit nose-dived to Rs.54 cr. (compared to Rs.267 cr. in the corresponding quarter previous year) due to jump in provisions arising out of fresh NPAs Rs.1800 cr. in corporate book. The bank tilted its credit portfolio towards retail and the share of retail: wholesale, now stands at 55: 45 (as compared to 45: 55 a year ago). However the shift was towards credit cards, micro finance and business loans, which are mainly unsecured and recovery in times of stress is not easy. As a consequence, its provisions went up to Rs.1425 cr. in the first quarter of FY 2021-22 and the bank reported a net loss of Rs.460 cr. Though in the quarter ended Sep 2022, it reported a net profit of Rs.31 cr. (as against net profit of Rs.144 cr. in Sep 2020), the strain in the financial results on account of stressed assets is very evident. GNPA at 5.40% (shown lower due to write off using accelerated provisions towards NPAs), restructured book at 4.20% indicate that the tough times are far from over.

Problem Areas of RBL Bank: Credit cards, microfinance, and business loans account for 87% of the total retail credit portfolio of the bank. Credit Card outstanding alone constitute 41% of retail and 22% of total advances.  Bulk of the core fee income comes from Credit Cards. Even in the second quarter of FY 2021-22, credit card has shown a growth of 11%. The branch expansion, with 237 outlets in the metro, needs moderation. Operating expenses other than employee and premises is also seen to show a higher growth y-o-y. Qualitatively, the board appears to shift its goals in an adhoc way. From Corporate, they shifted towards credit cards and micro financing. In Sep 2019, the presentation to investors talked about plans to increase affordable housing finance. During the current FY, the talk is on tractor financing. Any course corrections in the business strategy should be done after detailed discussions in the board.  Probably, setting up long term business strategy is one area, where the bank board may require RBI support.

'Retail credit push' of commercial banks is in for a Litmus Test: While RBL Bank’s  financial stress in 2019 can be traced to corporate exposure, the stress in the current financial year is due to its exposure in retail with particular reference to unsecured micro finance and credit cards. If net loss is an important factor that evidences the stress in financial health of a bank,  RBL Bank is not alone in the queue. Three more banks reported losses in the current FY 2021-22. 

Bandhan Bank Ltd., one of the two banks that got Universal Bank licence in 2016, incurred a net loss of Rs.3000 cr. for the quarter ended Sep 2022. Its pain points, as per the presentation to its investors, are GNPA at 10.8% and the stress in EEB portfolio (emerging entrepreneur business - mainly micro finance and unsecured), which accounts for 66% of total advances of Rs.81660 cr. as on 30.09.2021. The GNPA, restructured assets and SMA 2 accounts, which calls for close monitoring for recovery/upgradation, account for nearly 29%of its EEB portfolio (standing at Rs.54040 cr. as at the end of 2nd quarter of FY 2021-2022)

Ujjivan Small Finance Bank reported net losses in both the quarters of FY 2021-22 aggregating Rs.507 cr. for the half year ended 30.09.2021. A microfinance institution (MFI) turned into a SFB, the effect of COVID is severe on the bank.  It has a GNPA of 11.8%, restructured assets book of 10.2% (totalling 22% stressed assets) out of the total advances of Rs.14514 cr. as on 30.09.2021.

Suryoday Small Finance Bank, another MFI turned into SFB, reported net losses aggregating Rs.49.6 cr. for the half year ended Sep 2021 (its net profit reduced in Sep 21 as compared to June quarter). The stressed assets portfolio comprising GNPA and restructured assets book stood at 24.2% out of the total advance portfolio of Rs.4470 cr. as on 30.09.2021.

The performance of other Scheduled Commercial Banks (SCBs) including PSBs, PvSBs and SFBs in the current FY is mixed with some reporting higher net profit, while others showed decline in/moderate net profits. However, the increase in stressed assets (GNPA plus Restructured) is substantially higher in all SCBs with particular reference to the retail credit. It may please be noted that restructuring an asset calls for much more monitoring than a NPA/SMA 2 loan, to ensure that normalcy in operations is restored. In fact, much of the GNPAs in the Indian banking industry during 2011-16 arose from the restructured books. Much of the credit expansion in retail, ever since financial reforms in 1991 till 2015, was directed towards secured loans like home/mortgage loans, auto loans etc. With the advent of technology and enhanced consumerism among salaried and self-employed, the credit push in the retail in the last 3-4 years has been towards unsecured, credit cards and micro finance. Buy Now, Pay Later (BNPL) trend is also on the rise. Things would have gone smoothly for another two-three years but for the repeated lock downs, stoppage of economic activity due to COVID first/second waves and the OMICRON now.

Global Financial Crisis in 2008 owes its origin to reckless and loose ended mortgage loans in the West, which were packaged as CDOs (Collateralised Debt Obligations) later and sold/traded as bonds in the primary/secondary stock markets. Indian Banking Sector Financial Crisis witnessed during 2012-2019 can be traced to large corporate loans that were restructured (only for postponing the inevitable) and became NPAs having outstanding in multiples of original sanctions. Now the retail credit 'resilience' is in for a litmus test. The financial stress that may be witnessed in retail in 2021-22 and 2022-23 may not pose a systemic risk as the loan assets are small in size, well diversified and hence recovery percentage may be much more than the 60-70% haircuts witnessed in NCLT cases involving corporates. But it may create trouble for banks, which has high concentration unsecured loans in their books in relation to total advances and banks which are unable to bring in more capital to stay afloat. The resilience or otherwise of  retail credit may well define the business strategy of not only the banks but that of NBFCs as well in future.

V.Viswanathan

13th January 2022.