Bad loans in the banking system, especially in public sector banks, could go up further as the vendors/contractors whom they financed are understood to be facing payment delays from various Central Government departments.
The payment delay comes in the backdrop of the Government tightening its belt to keep the fiscal deficit within the targeted 5.3 per cent of GDP this fiscal (FY 2013) to stave off a downgrade in sovereign rating, say bankers.
Delays in release of payments by government departments will have a chain reaction with the vendors/contractors (mostly in the micro, small and medium enterprise category) in turn falling behind on loan repayments to banks.
The bottomline is that banks could see an accretion to their bad loans portfolio, thereby requiring them to make further provision for bad loans. Provision is an expense set aside as an allowance for bad loans and weighs on the profitability of banks.
Dividends could fall
If profitability of these banks is impacted due to provisions, then they will be constrained in declaring dividends.
Dividends paid by public sector undertakings, including public sector banks, help narrow the fiscal deficit, which arises when the Government’s total expenditure outstrips the revenue it generates.
While the Government may be determined to rein-in the fiscal deficit, the actions of its departments could end up hurting the interests of the banks in which it holds majority stake, said a senior public sector bank official.
There are 21 banks, including State Bank of India, Punjab National Bank, Bank of Baroda and Bank of India, where the Government holds over 51 per cent stake. These banks had collectively paid dividends aggregating Rs 5,666 crore to the Government in FY 2012.
NPA pressure
Public sector banks as a group are reeling under bad loans (also known as non-performing assets).
This is underscored by the fact that their gross non-performing assets to gross advances ratio rose to 4.02 per cent as at September-end 2012 from 3.57 per cent as at September-end 2011.
Given that MSMEs do not have the bargaining power, they may overcome the extended payment cycle by either supplying sub-standard materials to government departments or doing shoddy work, said a banker.
In the case of government departments, MSMEs at least have an assurance that if the payment does not come in 90-120 days then it will come in 240 days. However, MSMEs find recovering receivables from many large corporates an uphill task.