Bank of Baroda gives hope in pandemic-induced fear of bad debt stack

Indian lenders and their investors are bracing for an increase in an already unmanageable bad loan pile due to the pandemic.

After all, many borrowers have chosen not to repay their equivalent monthly payments by way of a moratorium, a sure sign of stress. Baroda Bank don’t think so. In fact, the public sector lender gave some rather optimistic indications during its conference call after the results today.

Bank management believes that the moratorium should not be seen as an indicator of stress. The lender derives its confidence from the fact that many borrowers who have opted for renegotiated schedules quickly returned to regular repayment schedules within two months. Bank of Baroda modernized ??1500 crore of loans which had the benefit of forbearance in terms of being labeled as bad. The bank said although 65% of its loan portfolio is under moratorium, that ratio will drop to 35% by August.

Granted, Bank of Baroda peers have also suggested lowering the moratorium ratio. Despite this, most lenders have been cautious in their outlook on asset quality.

Bank of Baroda, however, predicts that its slippages in FY2020 will not exceed those in FY20. One of the main reasons is that large business lending isn’t going badly. The increase in bad debts would come from retail and they would not be significant. “Despite the stress we are seeing from covid-19, we expect the slippages to be less than last year,” said Sanjiv Chadha, chief executive and CEO of the bank.

For fiscal 2020, the bank’s new slippages were around ??25,000 crores.

But all this optimism doesn’t mean the bank hasn’t taken precautions. The lender predicted risks associated with the pandemic beyond what the regulator assessed for the banks. Nevertheless, his provisions amounted ??6,844 crore for the March quarter, down 69% from a year ago. Certainly, the bank’s bad debt ratios have improved. Despite the drop in provisions, its coverage rate is 81%. The decrease in provisions enabled the lender to generate a net profit of ??507 crore vs. a net loss expected by analysts.

The lender’s baseline scenario is optimistic about the effects of the pandemic. It remains to be seen whether Bank of Baroda has plunged into optimism.

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Elizabeth J. Harris