HDFC Bank’s Aditya Puri Argues For Broad Loan Forbearance

The widening local spread of the Covid-19 virus has prompted a number of Indian states to impose a lock-down on all but essential services. The sudden stop for businesses has, in turn, raised the risk of a spike in loan defaults.

In response, bank stocks have fallen sharply.

India’s largest private lender HDFC Bank, in a conference call, said that banks reflect the economy and measures such as lock-downs could have some impact on bank portfolios. “This too shall pass,” Puri said after detailing the impact on the industry and the bank.

Key takeaways from the call are below:

On Broader Banking Environment

• This is more a biological than a financial crisis. But the situation will have a financial impact. The issue is what happens to companies and their cash-flow.
• Need to have a clear understanding of what is a bad loan and what is a crisis of cash-flow linked to measures related to temporary measures.
• Yes Bank episode has proved that a scheduled bank will not be allowed to go down in India.

On Policy Action Needed

• Should look at a non-traditional rate cut in the repo rate.
• RBI needs to come out with forbearance across the length and breadth of the industry. Everyone will be affected.
• No option but for the regulator to announce forbearance.
• At the fiscal end, must pull out all the stops to address issues related to daily wages.
• Fiscal deficit should be allowed to widen to deal with temporary disruptions. FRBM Act should be altered to ensure enough money is available to address the health risk and the economic risk.

On HDFC Bank Loan Portfolio

• HDFC Bank has high capital adequacy and is well-positioned.
• 16 percent of total portfolio is unsecured. Of the personal loan portfolio, 75 percent is to salaried borrowers. Existing portfolio is not showing any stress.
• Credit card spends will come down in the near term because of restrictions.
• The bank, even before the local outbreak of coronavirus, had already tightened its lending criteria.
• Job losses, if any, will start from the bottom of the pyramid. The restrictions would have to be a protracted process for HDFC Bank’s customer base to be impacted.
• 80 percent of wholesale lending to high-rated firms. In its corporate book, the bank has granular exposure spread across 150 sectors.
• Most of our SME portfolio comprises of borrowers which have a self-funding component of 60-65 percent. The bank takes additional collateral and follows stringent lending norms.
• HDFC Bank can increase working capital lines to borrowers if short term measures are needed to support them. The bank can also consider increasing loan-to-value ratio.
• Management has gone through the loan portfolio with a fine tooth comb. While there will be some rise in NPAs, it will be manageable.

On HDB Financial

• HDB Financial has been growing very well and has the lowest NPA ratios in the industry.
• Secured portfolio is higher in HDB Financial.
• The reason we floated HDB Financial is to go one or two levels below HDFC Bank and get a higher yield on our lending while maintaining profitability. That will continue in the future.

On Succession Planning

• Two years ago, HDFC Bank formed a committee to review business strategy
• The committee, of which Puri was also a part, pushed for higher customer acquisition using technology, building a strong rural and semi-urban business and grow the bank as a leader in the payments space
• The group also consisted of an internal surrogate for Puri who worked with him on the plan, as a means to plan for succession.
• The committee also made sure that there is an external candidate selected for the succession planning.
• Puri has been self isolating for a week in the wake of the coronavirus.