As the number of coronavirus cases continue to rise in India, many states have gone into a near complete lockdown; trains and other public transport are closed, markets and malls are shut, private firms have also been asked to implement a ‘work-from-home’ policy whenever possible and production facilities, too, have been suspended.
A shutdown will hurt businesses hard, sales will be hit at least in the short term and there will be cash flow issues. Many jobs may be affected too. To tide over this crisis, the country’s largest private sector lender, HDFC Bank, has called the need for a non-traditional repo rate cut by the Reserve Bank of India (RBI) to address liquidity issues, with a need to come out with forbearance across the industry.
In a conference call with reporters on Monday, Aditya Puri, MD and CEO of HDFC Bank, said the current crisis was biological and not financial and therefore, a lockdown was necessary to curb the spread of the virus outbreak, although cash flows of companies would be impacted.
“On the monetary side, my recommendation would be clearly that we do look at a non-traditional rate cut in the repo rate... It gives a stability to the system that the RBI is willing to pull out all stops. We have to clearly come out with forbearance across the length and breadth because cash flow of almost all companies will be affected if we have the lockdown,” Puri said.
He also said there was a need for a huge government stimulus to address the financial impact that would be caused by the COVID-19 outbreak. “When this government took over (in 2014), the fiscal deficit was 5.8 per cent. So, we have to pull out all stops to make sure what is necessary to alleviate the issues with the daily wage workers and the companies, to make sure we spend enough to be ready for healthcare and we put in as much stimulus as we can. Then, we live to fight another day,” he told reporters.
He sees the hospitality, travel and tourism sectors having a longer-term impact, while chemicals, electronics and automobile industry to an extent will also be impacted by the supply disruptions due to COVID-19.
Shares of HDFC Bank, the country’s most valued bank, have been under pressure, after a rare downgrade by a broking firm.
Sanford C. Bernstein analyst Gautam Chhugani wrote last week that HDFC Bank's portfolio was most exposed to the risk of unsecured consumer credit versus its peer private banks. As the share of unsecured consumer loan book has been increasing, the retail non-performing assets ratio for HDFC Bank, too, has been rising, he added, downgrading the stock to “underperform.”
Puri allayed fears about the bank’s financial health on Monday. He said the bank had $5 billion in surplus liquidity and 80 per cent of its wholesale portfolio comprised companies with a credit rating of AA or higher. “The total unsecured (loan) portfolio is 16 per cent, 6 per cent is cards and 10 per cent is personal loans. Of the personal loan portfolio, 75 per cent is to salaried borrowers from top tier clients. Consequently, there is no reason for us to be worried about that portfolio,” he said, adding the existing portfolio was not showing any strain.
He also pointed to higher collateral in much of its loans given to small and medium enterprises, which would cushion any problems.
“Eighty per cent of our SME (lending) is covered by additional collateral. The NPA (non-performing assets) has been in the 2 per cent range maximum. It is a granular portfolio, where we also have 85 per cent of self-funding,” said Puri.
Puri who built HDFC Bank from scratch is due to retire in October 2020. The Bernstein analyst had flagged succession-related uncertainties, too, in his ratings downgrade.
Puri said while the bank has strong internal candidates who have been groomed, it has also decided to look outside in search of “exceptional candidates.” “All that has been done, the recommendations are with the search committee and before April, an appropriate person, who will take the bank into the future, will be announced,” he said.
