HDFC Bank struggles with farm loan portfolio for the third year

HDFC Bank’s asset quality struggles with its agri-loan portfolio may well enter its third year in 2019-20, with the country’s largest private-sector lender already making provisions against future loan losses. In a conference call with analysts after HDFC Bank’s March quarter results, CFO Sashidhar Jagdishan said the bank has been providing for agri-related delinquencies for the last few quarters.

“So, there is a bit of a contingent trade provision that we have created for that, anticipating a bit of a spurt in the agri delinquencies in June 2019,” he said. “We created a portion of that in December 2018; so we have carried that and we have added some more in March 2019.”

Jagdishan pointed to uncertainties related to the results of the general election and likely farm-debt waivers thereafter. The bank is also taking into account private weather forecaster Skymet’s expectation of a weak monsoon in FY20.

Analysts say that stress in the agri portfolio will be a key monitorable in the quarters ahead. The consistently high share of agri loans in HDFC Bank’s slippages has led some of them to expect a policy on write-offs for such loans. In a recent note, investment bank Jefferies wrote: “Historically, there has been no specific write-off policy for agriculture loans. But given the evolving nature of credit costs and slippages, we think the bank may introduce specific policies on agriculture loan write-offs.”

Slippages, or fresh bad loans, tend to shoot up in the April-June and October-December periods because of the nature of the crop cycle in India. HDFC Bank has seen this trend intensify since the June quarter of 2017-18 when the full impact of demonetisation became apparent. Of the total slippages in that quarter, 60% came from the agri portfolio.

Thereafter, in Q3FY18, the bank’s management admitted that heightened delinquencies in the agri segment may be a new normal. “Slightly heightened level of agri-related NPLs (non-performing loans) is something that I think we’ll just have to perhaps live with,” a bank executive had told analysts in January 2018.

The phenomenon may not be restricted to HDFC Bank either. Another private lender – RBL Bank – had to contend with an increase in agri slippages in the quarter ended March 2019. The value of the bank’s gross non-performing assets (NPAs) in the agri book rose 17%, sequentially.

HDFC Bank