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Banking wrap: Bad loan worries resurface, RBI digital currency soon, bad haircut

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Both HDFC Bank and Bajaj Finance are considered some of the strongest players in the finance industry with good underwriting capability and may be an indicator of the stress in the industry in the aftermath of the second COVID-19 wave.

Banking wrap: Bad loan worries resurface, RBI digital currency soon, bad haircut
As the quarterly earnings season rolls on, non performing assets are back in the headlines.
Let me start with non-bank financier Bajaj Finance’s first-quarter earnings. After the big boy of banking HDFC Bank reporting a rise in stressed loans, Bajaj Finance’s worsening asset quality was concerning to say the least.
The non-bank lender’s gross non-performing assets ratio stood at 2.96 percent compared with 1.79 percent as on March 31 as local lockdowns to curb the severe second wave of Covid-19 infections hurt collections. Net NPA rose to 1.46 percent of total advances from 0.75 percent in the preceding quarter.
Bajaj Finance is a large player in the smaller two and three wheeler loan market, and a worsening asset quality in this segment is worrying because it mirrors what's actually happening on the ground in the middle-class borrower segment. Even its SME or small and medium enterprises segment saw a jump in bad loans. Both HDFC Bank and Bajaj Finance are considered some of the strongest players in the finance industry with good underwriting capability, and may be an indicator of the stress in the industry in the aftermath of the second Covid wave.
A top banker had recently remarked that haircuts under the resolution plans would make banks go bald. His fears seem well founded. But the shockingly large (almost 95 percent) haircut banks had agreed to take for the Videocon Group of industries, won’t pass muster easily. NCLAT has now stayed the implementation of the resolution plans, after two dissenting creditors- Bank of Maharashtra and IFCI—petitioned against it. The two banks raised concerns about the low value, and pointed out the NCLT order to show a “breach of confidentiality clause with regard to the Liquidation Value”, highlighting how the resolution plan value and liquidation value were “surprisingly very close.” Bravo to the lenders for standing up against this, but is there an alternative plan? We’ll have to wait and watch.
In other news, the shareholder of IDFC Limited had some cheer after the Reserve Bank clarified that IDFC Limited can exit as the promoter of IDFC First Bank Limited after the completion of the five-year lock-in period which ended last year. But hold your horses! The much-speculated reverse merger between the two entities, which IDFC shareholder have been hoping for- may not happen in a jiffy. For one, IDFC will require an explicit approval from RBI for any such merger. Also, IDFC may also have to exit or sell off its other financial business- IDFC AMC- to even make this application, if one were to go by the indications given as per RBI’s internal working group (IWG) recommendations.
Before we go, here’s some good news. The Reserve Bank has officially said that it is currently working towards a phased implementation strategy of the central bank digital currency! Yes, you heard that right. Deputy Governor T Rabi Sankar said that RBI has been exploring the pros and cons of introduction of CBDCs for quite some time, and is now examining use cases which could be implemented with little or no disruption. There are obvious benefits- such as reduced dependency on cash, higher seigniorage, reduced settlement risk, but also the associated risks to consider. In the words of Sankar, “Every idea will have to wait for its time. Perhaps the time for CBDCs is nigh.”