Bank of Baroda document shows stress may be higher than foreseen

He added: “The kind of stress we are seeing now is something which is unprecedented and therefore it is likely there may be some slippages which you can’t anticipate.”

A placement document of Bank of Baroda (BoB), for an equity fundraise, shows the lender’s special mention accounts (SMA) ratio surged to 21.57% as on December 31, 2020, from 8% on March 31, 2020. This would suggest that lenders’ collection efficiencies do not adequately reflect the level of stress in the system.

To be fair, the BoB management has signalled that the restructuring scheme may have been unable to address stress in the retail and micro, small and medium enterprises (MSME) segments, and there may be pain ahead.

Bank of Baroda MD and CEO Sanjiv Chadha said in January, “In terms of the known unknowns, things which have not fully played out yet that is where the MSME and retail are…Particularly, retail is the kind of book which was not being stress-tested.”

He added: “The kind of stress we are seeing now is something which is unprecedented and therefore it is likely there may be some slippages which you can’t anticipate.”

The SMA ratio indicates the share of a bank’s loans that have been delinquent for between 1-90 days. BoB’s SMA-0 ratio, or accounts where repayments were delayed by 1-30 days, contributed to much of the surge, rising to 13.44% from 5.47% during the period under review. SMA-2 accounts, where the repayment delay ranges between 61 and 90 days, shot up to 5.52% from 1.41%.

Earlier, a high bounce rate on EMI transactions had raised an alarm about the degree of delinquencies in lenders’ retail books. The National Payments Corporation of India (NPCI) has not yet released this data point for January or thereafter after the bounce rate was found to be persistently high at around 40% for months at a stretch.

There have been concerns, too, about the 90%-plus collection efficiency numbers being reported by banks and non-bank lenders. Analysts are now questioning the wisdom of conflating collection efficiencies with asset quality.

On Monday, Kotak Institutional Equities (KIE) said in a report that the data gives further credence to its view that there is a difference between collection efficiency and probable slippages that could be reported by lenders. “Information asymmetry is quite high and it would be useful for banks to report SMA and 90+DPD (days past due) as it provides a better understanding of the stress,” the report said.

The regulator is not particularly sanguine about bad assets staying under control, either. Loan losses in the banking sector, as measured by the gross non performing asset (GNPA) ratio, could nearly double to 13.5% by September 2021 in a baseline scenario, and to as high as 14.8% in a severe-stress scenario resulting from the pandemic, the Reserve Bank of India (RBI) had said in the December 2020 edition of its financial stability report (FSR).

The ratio of accounts in the SMA-2 category of the private-sector non-financial wholesale segment rose to 7.2% as on November 30, 2020 from 1.7% on September 30, 2020, according to the FSR. The sharp rise in SMA-2 loans coincided with the Supreme Court’s stay on recognition of bad assets after August 31.