Banks with exposure to microfinance customers to be hit severely: Krishnan ASV

A lot of banks do have decent exposure to unsecured MFIs, says vice-president of SBICap Securities.

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It is not about secured or unsecured loans. It is about what customer segments have you lent that money to.
I want to talk about this 9% fall in Kotak Bank. Many are saying that it is because of certain points that were highlighted in the conference call held yesterday. What were your takeaways? What exactly is causing this fall in the stock?
The commentary that has been coming from most of the banks in the system has been fairly consistent. Banks are focused on staying liquid and on conserving risk capital in these kinds of conditions. Obviously, credit growth is not a priority. Nobody really knows about asset quality, especially for certain segments of customers who might have lived with certain higher delinquencies for a short while.

Kotak Bank owns both. Narrative and commentary has been no different. But of course, this is a solid franchise; so that helps. It helps that they have one of the strongest current and savings account (CASA) ratios in the country and that is something that they have built organically. So those are relief factors. But the kind of precipitous fall that you are seeing in Kotak Mahindra Bank stock today is hard to explain if that is just based on what they said yesterday.

One assumes that a lot of retail customers are going to take advantage of this moratorium. They have also in fact said that there could be an increase in defaults due to which recovery will be delayed. Interestingly, they have also mentioned there were problems in unsecured personal loans such as credit cards and consumer durables. Customers who are fence sitters and have the ability to pay but they will not; this is going to give rise to this asset-liability mismatch, increasing the risk costs as well for the bank. But Kotak would not be the only one at that right? Which bank according to you at this point could see the most amount of asset–liability mismatch (ALM) due to this moratorium?
Yes, true. That would be true that just Kotak would not be alone. Also remember, Kotak has been flagging the risk with unsecured and personal loans portfolios for a while now. So they were amongst the first ones to say look, there could be some weakness in the portfolios around the corner. But so far the weaknesses had not cropped up; at least not in their stated numbers. This remained one of the biggest advantage points for the banking sector; one of the few sectors or one of the few segments that is not throwing up high GNPA but this environment is going to be quite demanding purely from a deferral point of view because the RBI’s forbearance essentially means nobody needs to recognize this as an NPA.

But having said that there is weakness in collections given that it is not something that the banks and other lenders can deploy very easily in this environment. So your last mile collections do take a hit. Non-salaried collections do take a hit and I would imagine that would be true for many other banks and I would not single out just a single lender.

Having said that ALM mismatches would be most acute; I think three-four vulnerable names are fairly well known. There are no surprises on that front. As I said, you need a strong deposit franchise. Kotak would be one with the strong deposit franchise.

You mentioned how nobody knows how this whole asset quality bit is going to pan out. At this juncture, which banks would again see problems? There is no NPA forbearance of sorts; so at this point of time, what will be that one big threat that banks could face?
It is not about secured or unsecured loans. It is about what customer segments have you lent that money to. So if you are a largely centred around salaried customers and if your portfolio is largely built up on salaried customers, there would be income shocks but those income shocks might be cushioned a little bit because if you have both PSUs and private sector employers within your portfolio, chances are that the PSU employers may not face any income shock right away whereas the private sector employees will probably face an income shock but a relatively lower income shock.

Over and above that, if you have self employed in your category, the income shocks will be far greater there; the elasticity to income shocks is far higher as more people from that customer segment may have to avail the moratorium even though interest accrues. So I think it is more a function of what kind of mix you have. MFI (microfinance institutions) is the customer segment that will be impacted because these are daily wage earners. So given where we are with the pandemic and lockdown, we have in effect the economic shock and the income shocks will be far higher for such customer segments.

Any bank which has a significantly large portfolio or large exposure as a proportion of their loan mix to that; so the likes of IndusInd Bank, RBL Bank do come to mind. A lot of banks do have decent exposure to unsecured MFIs; it is about how you can mitigate the risk in this environment. The more solid your frameworks are, the better off you will be.





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