The bad loan problems of public sector banks have worsened significantly in the last three months, with manufacturing output slowing and interest rates rising further.
Gross non-performing assets (NPAs) of these banks increased by 20 per cent between June and September 2011, the highest slippage in the last several years.
The Rs 16,132-crore increase in NPAs in the latest quarter was more than the increase for the entire previous fiscal. Andhra Bank, State Bank of Hyderabad, State Bank of Bikaner and Oriental Bank of Commerce saw more than 50 per cent rise in NPAs over these three months. Loans are classified as NPAs when a part of principal or interest is due past 90 days.
Computer-based identification of bad loans and restructured assets going bad escalated problems for public sector banks.
As a result, gross NPAs for state-owned banks rose from 2.45 per cent in June to 2.9 per cent by the September quarter. Private banks have managed much better with gross NPAs falling.
Automatic recognition
September 30, 2011 was the deadline for banks to shift to system-based identification of NPAs. Public sector banks made this shift recently. Computer-based NPA recognition removes the subjectivity that the banker may exercise in classifying a loan as non-performing. Smaller loan accounts, particularly agricultural loans, were the last to migrate to this system, and seem to have suffered the biggest slippage.
Canara Bank, for instance, reported Rs 1,280 crore of additional NPAs, 33 per cent of the total because of such migration. Similarly, Union Bank of India witnessed a 20 per cent addition to NPAs from such accounts.
Another reason for the rise in NPAs is the phenomenon of restructured loans going bad.
Restructured assets refer to loans on which banks have allowed customers to postpone their interest payments until business prospects improve. Such restructured loans accounted for 4.4 per cent of the loans outstanding for the top nine state-owned banks. These banks accounted for over half of all loans advanced by the industry.
The restructured loans that turned bad accounted for 17 per cent of all advances for these banks.
The government-owned banks' net NPA ratio, after setting aside provisions, went up by nearly a third or Rs 12,000 crore.
Due to these and other challenges, public sector banks saw a modest 5.4 per cent growth in profits in the September quarter. Private sector banks managed a 27 per cent growth.