From the lender’s perspective, a loan that is classified as a non-performing asset (NPA) would mean that the bank would have to take a hit on its earnings. This is because it has to provide for such a loan and, at the same time, any interest payments that it has already received will cease to be regarded as income. For the borrower, what this means is that the bank will at some point initiate recovery proceedings and may recall the entire loan. A loan is classified as an NPA when it is overdue for 90 days.
Currently, there is a standstill on classifying defaults during the pandemic as NPAs because of a Supreme Court stay order. However, Axis Bank is already making provisions from its earnings, although the order would mean that recovery proceedings cannot be initiated. The RBI did allow banks to go in for one-time restructuring, but the last date for the applications ended on December 31.
The bank’s conservative approach to loan classification was disclosed by the bank’s MD & CEO Amitabh Chaudhry while announcing the bank’s results for the quarter ended December 2020. The bank reported a net profit Rs 1,116 crore, which is a 36% drop from the net profit of Rs 1,757 crore in the quarter ended December 2019. The bank said that the profits were adversely impacted due to the prudent expense and provisioning charge of Rs 1,050 crore.
For the third quarter, the bank said that Rs 6,736 crore of additional loans slipped into default. The bank’s CFO Puneet Sharma said the retail slippages came from unsecured loans, self-employed segment and mortgages as well.
Chaudhry said, “We are in the risk-taking business. When we see risk in front of us, we have to make prudent provisions. We have provided as though the Supreme Court dispensation (barring lenders from classifying loans as NPA) is not there. We have reversed interest earnings and fees from our income on these loans.”
According to Sharma, taking a borrower-led approach for recognising NPAs rather than a loan account-led approach was more prudent. He said that despite the high provisioning, there was record growth in retail disbursements in December 2020.
Chaudhry added, “On one side, we have a stock of loans where, post-moratorium and Covid crisis, there is a problem which we have recognised. On the flip side, the third quarter was the best in terms of disbursement. Our focus is to look at more secured rather than unsecured business. The momentum of business is picking up day after day.”