Axis Bank Ltd. said farm loan waivers announced by state governments have made it harder for banks to collect interest payments from its agri-loan customers.
Borrowers are “waiting it out and taking a bet that maybe they will get a waiver," the private lender’s Chief Financial Officer Jairam Sridharan told BloombergQuint on the phone.
Our total retail slippage is somewhere under Rs 1,000 crore, Rs 900 crore nearly, out of which half is related to agriculture.Jairam Sridharan, CFO, Axis Bank
Rival HDFC Bank Ltd. too had flagged off stress in its agri-book due to farm loan waivers announced by state governments in Uttar Pradesh, Maharashtra, and Punjab.
Axis Bank’s watch list, which includes closely monitored stressed accounts, declined 16 percent during the quarter to Rs 7,941 crore. Loans worth Rs 797 crore on the watchlist turned non-performing assets, while advances worth Rs 713 crore were repaid in the quarter. The Mumbai-based private lender’s profit declined for the sixth straight quarter.
Here are edited excerpts from the interview with Sridharan.
How would you sum up the quarter? While slippages have moderated, the non-watchlist category slippages have increased. Why is that?
There are two-three basic dynamics going on here. Firstly, the fact that our watchlist itself is a much smaller entity now than it was five quarters ago. That time the watchlist was around 6.5 percent of our loans, now it’s 1.8 percent. So naturally the contribution of our watchlist to our overall slippages will be low and be a little volatile when it’s this small. So we can’t predict every quarter.
Secondly, there’s the seasonality perspective. There are some businesses that see higher slippages in the first quarter, like retail and small and medium enterprises, and we have seen a little bit of that.
Thirdly, you know some of the issues going on in the agriculture sector and because of which agri has some special challenges and we have seen some elevated slippages there.
Finally, if you go back to the corporate sector, the slippages that have come from outside the watchlist have come from the sectors which have been challenged in the past and we have highlighted them earlier, such as iron and steel, infrastructure. So overall, when I look at the numbers and the slippage rate, I am satisfied and happy with the steady moderation in the overall slippages environment.
It is difficult to predict on a quarter-on-quarter basis, but the fact is that its steady and moderating and in-line with all our expectations, and it gives us the confidence that we will trend towards our long-term averages by next year.
Will slippages not show an uptick on an annual basis? Also, can you provide some more clarity on the bad loan pressure in the agriculture book, since that seems to be a trend across the banking space.
On an overall basis, you’re right, things like retail, SME, a large part of the corporate business - you’re not going to see much elevation - they will show moderation on a full-year basis so I’m not going to be too worried about that. Though the quarter-on-quarter volatility is a bit hard to predict.
On agriculture, driven by some of the recent developments around announcements and speculation around farm loan waivers in select states, we have seen some challenges in the agricultural sector with customers waiting it out and taking a bet that maybe they will get a waiver. Hence banks are finding it a challenge to collect.
That’s the problem we have seen in three of the large states and that has affected our numbers as well. Given the base I don’t think it’s a secular trend but it is something that has impacted numbers this quarter and we have appropriately provided for it.
Farm Loan Waiver Speculation
What quantum of loans have been impacted by the ‘stress’ in the agriculture sector? You’ve said that this phase is temporary, however state governments have reported that they are unable to raise adequate funds to compensate banks. Do you expect the stress to continue for 3-6 months, 6-9 months or over a year?
Our total retail slippage is somewhere under Rs 1,000 crore, Rs 900 crore nearly, out of which half is related to agriculture. It’s true that some states are finding it difficult to raise funds, however some of the big states have already doled out reversal schemes. In agriculture, the big states remain Punjab, Maharashtra, Andhra Pradesh, Karnataka and to some extent Tamil Nadu.
Microfinance: Worst Over
Do you expect any improvement in your microfinance portfolio anytime soon?
In the MFI sector, the problems for us lie in the past since we were unable to identify issues in there from a risk perspective. What we did see was that underwriting practices had deteriorated quite a bit. But that seems to have moderated by now. We were growing our microfinance business by 40-50 percent, year-on-year. Now we have brought that number down to 15-16 percent year-on-year. So, I don’t think growth rates will fall much further, they might start picking up again.
Has the reversal of provision for one cement account, that you had made in the previous quarter and had also retained on your watchlist, been completed?
No, we have retained large part of the provision.
No Incremental Provisioning
You’ve made additional provisioning of Rs 184 crore for the four stressed sectors. Do you see incremental provisioning to continue for those sectors and any guidance you would like to give?
No, incremental provisions are not being contemplated. This was a one-time thing, as per RBI rules we had identified some stress in the sectors and increased provisioning. But it’s just a one-time deal and not a regular exercise.
Interest Margins To Remain Stable
Is it fair to assume that net interest margins would continue to remain under pressure owing to the marginal cost of funds based lending rate (MCLR)cut?
They will continue to remain under pressure, but not dramatically. We have seen net interest margin about 4 basis points lower in this quarter and we had mentioned in the beginning of the year that we see compression of about 20 basis points throughout. So we are seeing some stability there.
Focus: Strong Balance Sheet
You’ve mentioned that you are in the de-risking mode. Most people believe this would put pressure on core income and margins as well?
We will do what is prudent from a long-term balance sheet. We are not going to be a whole lot concerned about managing the quarter-on-quarter profit and loss pressures and what we want to do is build a strong balance sheet and whatever it takes to get that done, what provisions need to be made, we’ll go ahead and make it.
Shikha Sharma Headed To Tata Group?
We understand that there could potentially be a leadership change when Shikha Sharma’s term comes to an end.
I know there has been a lot of speculation around that but there’s absolutely nothing here. We even put a statement out yesterday that these rumors are absolutely baseless.
Shikha is our leader and she continues to be our leader and she’s going to be around.
Also Read: Tata Sons To Hire Axis Bank’s Shikha Sharma
RECOMMENDED FOR YOU
POPULAR