Stress on bank loans reduced in first half FY16: ICRA

The banking sector saw a moderation in the pace of stressed asset formation from around 5.6 per cent in FY15 to 3.3 per cent in the first half of FY16, according to a report by ratings agency ICRA.

Including the exposure refinanced under 5/25 scheme, however, stressed assets formation remained high at about 5.5-6 per cent during the period.

“As a result of moderation in the pace of stressed assets formation, the consistent increase witnessed in stock of stressed advances over the last few years was arrested in H1 FY16 (stressed advances remained largely unchanged at 10.7 per cent as of September 2015 as against 10.6 per cent as of March 2015,” the ICRA report said.

Gross non-performing assets (NPAs) of public sector banks increased to 5.6 per cent as on September 2015 (vs. 5 per cent as on March 2015); private banks’ Gross NPAs were 2.2 per cent (2 per cent as on March 2015). Within public sector banks, SBI Group fares much better on asset quality.

Notwithstanding the reduction in fresh stressed asset formation, the high exposure of the banking sector to Steel and Power (around 14% as of September 2015, out of which only around 20% is classified as stressed) remains a credit concern.

Should some of these large exposures slip in the classification, the ‘reported’ vulnerable numbers could also worsen, it added.

On the credit growth front, the report noted that private banks grew three times faster than government banks. public sector banks’ year-on-year credit growth dropped to 6.2 per cent as on September 2015 as compared with private banks’ 18.3 per cent. Softer interest rates in capital markets as against banks’ base rates continue to impact their credit growth negatively.

Banks’ credit growth dropped to a multi-year low of 8.8 per cent and overall systemic credit growth (including corporate bonds and commercial paper) was higher at 11.6 per cent.

Of this, credit to industry declined to 4.9 per cent (y-o-y), while retail and agriculture posted healthy growth.

The third quarter in FY16 could be more challenging for public sector banks due to lowering of base rates, it added.

Further, it said public sector banks need ₹10,000-20,000 crore Tier-I capital in FY16 from external sources. If they are unable to raise this, seven public sector banks would need more equity from the government over and above the existing allocation, else they will have to curtail credit growth.