Higher stress in agri, MSME, retail segments: Large banks see slippages rise in Q4

Most large banks reported an increase in fresh bad loans on a sequential basis for the quarter ended March 2022. A clutch of 17 banks reported slippages worth Rs 53,512 crore in Q4FY22, 28% higher compared with the third quarter of FY22. Although the trend is partly attributable to the lumpy Future Retail exposure slipping during Q4, higher stress in the agri, MSME and retail segments made a significant contribution to banks’ bad loan pie.

The lenders that saw the sharpest rise in slippages were UCO Bank and Punjab National Bank (PNB), where the figures rose 150% and 138%, respectively. Both banks had new chief executives taking charge during the March quarter.

PNB’s slippage pool of Rs 10,506 crore was the biggest among large banks, with stress being spread across the retail, agri and micro and small and medium enterprises (MSME) segments. Of the Rs 2,871 crore worth of MSME slippages, Rs 838 crore was from borrowers who availed of funds under the emergency credit line guarantee scheme.

In coming quarters, PNB expects slippages to continue emerging from smaller accounts. AK Goel, MD & CEO, said in a post-results investor call that the bank’s SMA 2 portfolio in accounts of Rs 5 crore and more stands at Rs 120 crore, down from Rs 3,000 crore in December 2021. “But definitely, slippage may be from some small account, so we will strengthen our monitoring as well as collection systems,” Goel said.

Stress in the MSME segment hurt banks particularly during FY22, with ravages of the second wave of Covid leaving them crippled. VS Khichi, executive director, Bank of Baroda (BoB), told analysts that small enterprises have been experiencing difficulties across the board. “I’ll just say that most of the MSME sector at that point of time was reeling under pressure and we have seen slippages to the tune of say around Rs 3,000 crore in this full financial year, but the situation seems to be tapering off and is much better now,” Khichi said.

Despite rising slippages, analysts are taking heart from the fact that recoveries by banks have been improving. Emkay Global Financial Services observed in a recent report on BoB that while fresh slippages at the bank were higher at Rs 5,800 crore, accounting for 3.2% of loans, higher recoveries and write-offs led to a 64-bps reduction in the gross non-performing asset (NPA) ratio to 6.6%. The bank’s SMA-1 and 2 pool also declined to a low of 0.4% from 1.1% in Q3.

At the same time, banks’ improving asset quality ratios may not be adequately reflecting the stress building up in restructured retail and MSME accounts. In a recent report, analysts at Fitch wrote, “We believe substantial growth in retail loans and exposure to micro and medium-sized enterprises (MSMEs) and vulnerable corporate sectors have created risks that are not captured in the improving impaired loan ratios due to regulatory forbearance.”

Risks are lower in retail loans due to a high share of secured loans, but banks with greater exposure to unsecured loans, loans to self-employed and low-income borrowers may face challenges, according to the agency, which regards MSMEs as the most vulnerable segment.

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