The banking industry is worried over the high level of non-performing assets (NPA), especially in public sector banks. The rise in NPAs in 2014-15 has been attributed to the effects of global recession coupled with internal factors such as slowdown in the domestic economy. This has adversely affected the corporate performance leading to a negative impact on credit quality.
The asset quality of public sector banks (PSBs) deteriorated in comparison to private sector banks as big ticket corporate loans form a larger share of the credit portfolio of PSBs. The five sectors — infrastructure, steel, textiles, aviation, and mining — where PSBs have large exposure, have contributed to the big rise in NPAs, as PSBs dominate the Indian banking sector. Most of the banks have started focusing on retail loans, avoiding exposure to big corporates and consortium lending. They feel that larger contributions from small ticket retail, MSME and SME loans and limiting unsecured and large ticket exposure would help in containing NPAs.
The NPAs are classified into two categories — gross NPAs and net NPAs. Gross NPAs are the sum total of all loan assets that are classified as NPAs as on balance sheet date, as per the Reserve Bank of India guidelines. Gross NPAs reflect the quality of loans made by banks. (Gross NPAs ratio = gross NPAs/gross advances).
The banking sector has witnessed two years of slower economic growth that led to projects being stalled and corporate balance sheets getting stretched which led to a slowdown in corporate credit demand and also caused a surge in bad loans.
Going through the performance of 15 public sector banks, for which the results for 2014-15 are available (only four PSBs are yet announce their results), six of them have reported gross NPA levels at an alarming level of more than six per cent. These include United Bank of India, Indian Overseas Bank, UCO Bank, Punjab National Bank, Bank of Maharashtra and Central Bank of India. Allahabad Bank, Andhra Bank, Oriental Bank of Commerce, Dena Bank have achieved gross NPA levels between five and six per cent.
In the private sector banking space, the gross NPA ratio is 3.78 per cent for ICICI Bank for 2014-15, against 3.03 per cent in the previous year. Federal Bank has an NPA of 2.04 per cent (2.46 per cent ), Lakshmi Vilas Bank 2.75 per cent (4.19 per cent) and Karur Vysya Bank 1.85 per cent (0.82 per cent)
The gross NPAs of associate banks of State Bank of India are: State Bank of Travancore 3.37 per cent (4.35 per cent), State Bank of Bikaner & Jaipur 4.14 per cent (4.18 per cent) and State Bank of Mysore 4 per cent (5.54 per cent). State Bank of India and its other associates are yet to come out with their numbers.
Analysts said that there were more additions to stressed assets and fresh restructuring in the fourth quarter of the financial year and this could be one-off kind of an event.
While announcing the financial results recently, Chanda Kochhar, Chief Executive of ICICI Bank said “I would believe that 2014-15 was probably in that sense the peak as far as the addition to NPA (non-performing assets) and restructured assets is concerned as well as credit cost."
As far as ICICI Bank was concerned, she said much of the addition to bad loans was from assets that were already troubled and had been restructured and not due to “new problem assets”. She expected the new fiscal year that began in April to be "better".
In some cases banks have reported improvement in asset quality on a sequential basis in the last two quarters of the financial year over the second quarter and NPAs have dropped on quarter-on-quarter basis. Banks see that there has been a sizable reduction in fresh slippages compared to previous quarters.
Whatever be the reasons for mounting NPAs, the RBI had called for better governance in PSBs to bring down NPA levels, which would otherwise affect the very existence of these banks.
However, rating agency ICRA said the percentage of bad loans in the banking system was expected to rise and cross five per cent in the current fiscal.
Another rating agency, CRISIL feels that private sector banks were expected to grow at twice the pace of capital hobbled PSB (public sector banks) in the next four years.
In the current fiscal, gross non-performing assets (NPAs) of Indian banks are seen edging up by 20 basis points (bps) to 4.5 per cent of advances - or rise by Rs. 600 billion to four trillion.
"Weak assets are expected to stay high at 6 per cent (Rs. 5.3 trillion). Worryingly, exposure of banks to vulnerable sectors is expected to remain high, just the way it was in 2014-15," Crisil said.
According to Crisil, bad loans are seen rising mainly because of withdrawal of regulatory forbearance on restructuring, and high slippages from restructured assets. As much as 40 per cent of assets restructured between 2011- 14 have degenerated to NPAs.
''Going forward, the latitude now afforded to flexibly structure project loans will enable lower slippages from large exposures. However, it can partially mask asset-quality pressures as reported NPAs may not be a true reflection of the extent of stress in banks,'' it said.
Crisil's calculations show that about Rs. 800 billion of stressed loans could be structured during 2015-16.
Prospects of the economy growing faster this financial year have raised hopes that this will help to curb additions to bad loans and also improve credit demand. Demand for loans from companies has yet to revive significantly although consumer lending is growing fast.
varadharajan.srinivasan@thehindu.co.in
(This article first appeared in The Hindu dated May 18, 2015)