Banks are gradually experiencing the knock-on effect of corporate loans which have either become non-performing or are undergoing restructuring.
Retail loans, especially home loans, that banks have given to employees of such companies under the ‘corporate salary package’ are showing propensity to turn sour, say bankers.
The stress is particularly perceptible where employees, though continuing to be employed with the company which is in the throes of debt restructuring, have either not been receiving salaries or had to take a substantial pay cut.
Defaults are also gradually showing up in cases where employees have been retrenched by companies, which have turned non-performing for banks, but have not be able to find employment subsequently.
A loan becomes non-performing for a bank if interest and/or instalment of principal remain overdue for more than 90 days.
Banks and financial institutions restructure debts of viable corporate entities affected by internal and external factors by making concessions such as reducing the interest rate and rescheduling repayments.
When banks give companies loans, be they term or working capital loans, they expect employee salary accounts to be shifted to them under the corporate salary package (CSP). Banks make up for the softer interest rate on corporate loans from CSPs.
The advantage for banks under CSP is that not only do they get access to cheap float funds but they can also cross-sell home, auto and personal loans.
Pitfall
However, the pitfall is that if the company whose employees are covered under CSP gets into financial trouble, the ripple effects are felt by the bank.
The primary impact on banks is on account of the corporate loan becoming bad. The second round effect is due to employees’ inability to service the loan, said a senior public sector bank official.
Bankers say CSPs for Central and State public sector undertakings and the Defence services are safe bets due to government backing for these entities. Offering CSP to blue-chip companies is also relatively safer.
However, in the case of mid-size companies, which feel the heat more during an economic downturn, CSPs may be a risky proposition.
According to the Reserve Bank of India’ s latest financial stability report, asset quality concerns in the banking system persist as the growth in NPAs accelerated and continued to outpace credit growth.
NPA concerns
NPAs grew at 43.9 per cent as at end-March 2012, far outpacing credit growth of 16.3 per cent. The divergence in growth rate of credit and NPAs has widened in the recent period, which could put further pressure on asset quality in the near term, said the report.
The gross NPA ratio increased to 2.9 per cent of gross advances as at end-March 2012, as against 2.4 per cent as at end-March 2011.
The increase in gross NPAs for the year ending March 2012 was largely contributed by retail, real estate and the priority sector. Certain sectors such as power and airlines also saw significant increase in impairments.