Bad loans continue to weigh on banks in second quarter

Even as Prime Minister Narendra Modi’s achhe din promise has boosted sentiments in the economy, banks are struggling with a rise in bad loans in the second quarter ending September 30.

Asset quality pressure during the quarter has led banks to make higher provisions, setting aside more money towards non-performing assets, thereby impacting their profitability.

Among the big public sector banks, Bank of Baroda and Bank of India announced deterioration in bad loans in the July-September period and forecast further worsening in asset quality in the current fiscal.

The country’s largest lender State Bank of India, which is due to announce results on Friday, is also likely to see bad loans rising.

According to P Srinivas, Executive Director, Bank of Baroda (second largest public bank), “Some positive signs in Q1 could not be sustained in Q2 … Real sector indicators showed signs of weakness partly due to domestic and partly global economic concerns.”

Bank of India said it saw major restructuring in the troubled sectors, namely, infrastructure, engineering and power.

With economic growth falling below 5 per cent, bad loans for banks have jumped to more than 4 per cent of their total assets this year from 2.4 per cent in 2011. In addition, credit growth has fallen to its lowest in more than a decade.

Bank of India chief VR Iyer said, “We have not witnessed any up-tick in credit demand from large corporates … It will take a year or so for the government measures to have an impact on the banking and financial sector.” According to ICICI Bank’s MD and CEO, Chanda Kochhar, “Only after cash flows (in companies’ balance sheet) become robust, we will see recovery (in asset quality) … Real pick up of demand for fresh project loans will take a couple of quarters.”

Currently, India’s banking sector is sitting on around ₹6-lakh crore worth of stressed loans (both NPAs and restructured) — or nearly 10 per cent of the total advances, according to estimates by India Ratings and Research.

It also expects banks to restructure loans worth ₹60,000 crore to ₹1-lakh crore in the next five months, as the RBI has mandated that after April 2015 banks must treat all restructured standard advances as NPAs and make provisions accordingly.