Axis Bank: 'Technical Impact' On NPAs, Or Normalisation Of Processes?

India's third largest private sector lender, Axis Bank Ltd., reported its first quarter results on Thursday. Net profit for the lender fell 4% year-on-year to Rs 5,086 crore. Apart from the middling growth and sharp drop in margins, the lender's worsening asset quality has become a clear talking point.

On Friday, the stock opened sharply lower, as investors turned cautious. At close, Axis Bank shares were at Rs 1,099.1, down 5.24%.

At the centre of the asset quality conversation are the new bad loan recognition and classification policies the bank has implemented in the April-June quarter. These norms are tighter than what the bank had previously followed, and the market had got a fair warning of these changes, when the March quarter results were announced. Axis Bank is calling these changes a "technical impact".

Due to the new policies, Axis Bank's quarterly gross bad loan additions sharply rose to Rs 8,200 crore in the first quarter. This threw the gross non-performing asset ratio up, rising 29 basis points quarter-on-quarter, to 1.57%. The resultant higher provisioning also ate into profitability for the lender.

Without the so-called technical impact, gross bad loan additions during the quarter would be around Rs 5,491 crore. That would still be the highest quarterly addition in four years since June 2021. Back then, the lender reported gross slippages worth over Rs 6,500 crore, as India was in the midst of a devastating second wave of the Covid-19 pandemic.

Profit after tax would have been Rs 614 crore higher, if you take the technical impact out of the equation, the bank says.

"Yes, we are going through a cycle. Yes, we are seeing elevated slippages and elevated credit costs," Amitabh Chaudhry, chief executive officer and managing director of the bank, told analysts over a conference call on Thursday. "But also at the same time, we have been sharing that the stock, which is being booked, is very clearly showing to us that the quality is improving and improving quite rapidly."

"In that sense, within a defined time period — I don't know what that defined time period is, we have not given any guidance — we will see credit costs reverting to lower levels," Chaudhry said.

According to the bank's disclosures, the technical impact emanates from changes to upgradation and classification norms in cash credit, overdraft and one time settlement accounts. Nearly 80% of the loans have full security cover, the bank said.

But beyond that, clarity on the new policies is limited. The bank did clarify that these changes were entirely self-imposed that the regulator had no role to play in this. Chief Financial Officer Puneet Sharma even added that Axis Bank might now be the most prudent bank in the country.

"Basis the benchmarking we do and the policy that we have as of June 30, 2025, I do not think there is a bank more prudent than us on asset classification and upgrades combined on the street today," Sharma told analysts.

To be sure, this is not a metric actively tracked by any analyst, so there is no real way to assess whether Sharma's confidence is backed by facts.

Let's take a look at what we know about the technical changes.

While Sharma did not explain all the changes the bank has made to its asset quality management standards, he did give an example.

Sharma's example included a borrower who has availed a Rs 100 loan. Assume that it is now five days past the date of this borrower's first installment and there has been a default. The bank's collection team has assessed that there is no way this customer is able to pay right now, so a one-time settlement is being applied.

This hypothetical settlement will give a 90-day moratorium on payments (starting from the original due date) and will allow the borrower to repay dues in three installments of approximately Rs 30 each. Now typically, once the moratorium runs out, the borrower is classified as an NPA. If the borrower pays his first installment of Rs 30, their "overdue" amount is cleared. Till March 31, 2025, the bank would have upgraded that loan account to standard, once the first payment comes in, Sharma explained.

Under the new standards, the upgradation is not approved, till the borrower has repaid the entire loan.

Now, this is only one very specific example of a settlement plan and resultant asset classification. Sharma told analysts that he does not wish to discuss all the changes the bank has made in its classification and upgradation policies. Though there are many other such changes being implemented, he added.

All good? Let's take a look at what the Reserve Bank of India's rules actually say.

The one-time settlement rules issued in September 2005 by the regulator state that in such cases, if the NPA is a "doubtful" or "loss" account, it can only be upgraded if the entire outstanding balance is recovered.

For simplicity, there are three categories of NPAs the RBI recognises.

• An NPA which is less than 12 months old is classified as "substandard".

• Once it crosses the 12-month mark, it becomes a "doubtful" account.

• Once a bank has determined that recovery is not possible or is highly improbable, it is classified as a "loss" account.

These distinctions are on the basis of probability of recovery from these accounts. These are part of the RBI's income recognition and asset classification norms.

That brings us to critical questions:

• Is Axis Bank considering its one-time settlements as "doubtful" or "loss" accounts?

• If most of the loans under this technical impact are fully covered with security, why is the recoverability an issue?

In the discussions the bank has held with analysts and reporters, this is not thoroughly answered.

Now let's look at what the rules for cash credit and overdraft accounts are.

In such accounts, the bank typically gives a line of credit to the borrower, which they can access when needed. They need to consistently repay dues, to ensure that the line is active. If they default on payments, these loans go "out of order". In normal circumstances, these loans are not backed by collateral. However, banks are required to downgrade all loans of a borrower to NPA, if one account is classified as such. This puts pressure on the borrower to clears dues at the earliest.

The RBI's norms issued in November 2021 and then again in February 2022 clarify that banks must recover the "entire arrears of interest and principal" from the borrower, before upgrading the account to "standard" status.

The regulator issued these clarifications because it noted that banks were upgrading loan accounts after receiving interest payments or partial overdue payments, it said.

So, the next crucial question is: is there anything materially different that the bank is doing than what the regulator already mandates? Was there a pressing need to tighten norms right now?

Unless the bank is able to convince the street about these questions, views might be difficult to change.