The Finance Minister recently cautioned banks regarding rising non-performing assets (NPAs) in 2010-11. Institutional investors also seem to be perturbed about the NPAs of Indian banks after State Bank of India (SBI) declared a Gross NPA (GNPA) figure of Rs 25,326 crore, or 3.28 per cent of its advances in 2010-11. They are apprehensive that the NPA position of SBI reflects that of the entire banking industry.
The starting point for understanding the NPA position of banks is the gross NPA level. The gross NPAs tell us about assets which do not earn any return at present. Ultimately, the bank may have to absorb the losses arising out of them by providing from its profits. Given the gross NPA levels, banks make provisions from their profits, guided by the regulatory requirement/age of the NPAs and their assessment regarding the recovery of loan amount. The NPA numbers, which are reported after provisions, are the net NPAs.
UNDERSTANDING NPAs
However, as the loan portfolio grows, it is possible that the absolute amount of bad assets might increase. As such, the bad assets have to be seen relative to the loan portfolio. This is expressed as the GNPA ratio or a percentage.
The net NPA figures are also expressed both in absolute amounts as well as a percentage of assets. While the gross NPA numbers tell us about loans that do not earn any income for the bank, the net NPA numbers tell us about the potential loss to the banks as a result of NPAs. As a bank is a going concern, the absolute NPA numbers for a given year might be affected by the credit events in the distant past.
Ideally, one should be looking at three things — first, the fresh addition to NPAs in a particular year; second, the reduction in NPA that year; and third, the net addition/reduction after accounting for fresh slippages and reductions. The reduction in NPA during a year can come through recovery (cash recovered from past NPAs), upgradation (assets which had fallen in the NPA category and have started to pay off) and write-off (NPAs taken out from the balance sheet of the bank). The preferred mode of reduction would be recovery, upgradation and write-off, in that order.
SBI AND THE REST
What do the numbers suggest on these counts for 2010-11? We will consider the nationalised banks and SBI, which account for more than 70 per cent of the banking assets. The delinquency ratio indicates fresh slippage and is computed as a ratio of the addition to NPA in a given financial year to the gross advance figure of the previous financial year. It is considered a good indicator of the quality of the loan portfolio.
Deterioration in the delinquency ratios is a clear reflection on management of the asset quality of a bank. Delinquency ratio for SBI has, in fact, deteriorated from 1.85 per cent in 2009-10 to 2.35 per cent in 2010-11. Among the 19 nationalised banks, 12 had a lower delinquency ratio in 2010-11 compared with 2009-10.
The average delinquency ratio for nationalised banks declined from 1.88 per cent to 1.55 per cent in 2010-11. For nationalised banks, NPA reduction through cash recovery and upgradation of earlier problematic assets increased by 55 per cent and 40 per cent, respectively, in 2010-11 over 2009-10. Further, the amount written off also increased by 48 per cent in 2010-11. The total reduction by all the three modes increased by 41 per cent in 2010-11 for nationalised banks.
For SBI too, NPA reduction through upgradation increased by 38 per cent and the amount written off by 101 per cent in 2010-11. The difference in the NPA position of SBI and the nationalised banks lies in the net addition to NPA in 2010-11 over 2009-10. While the net addition to NPAs declined by 25 per cent for nationalised banks, it increased by 52 per cent for SBI.
It is the increase in fresh slippage by 53 per cent in 2010-11, which has made the difference to the NPA position of SBI and the nationalised banks. For nationalised banks, the increase in fresh slippages was only 18 per cent between 2009-10 and 2010-11. The net result of all these dynamics is reflected in the GNPA figure of SBI which increased to 3.28 per cent in 2010-11 from 3.05 per cent in 2009-10.
For nationalised banks, the containment of the fresh slippages resulted in the GNPA figure declining from 1.96 per cent in 2009-10 to 1.92 per cent in 2009-10. After provisions, the net NPA stands at 1.63 per cent for SBI and only 0.97 per cent for nationalised banks.
SATISFACTORY SCENARIO
Hence, the NPA numbers and the dynamics governing them suggest that SBI might not be representative of the banks in India when it comes to the NPA scenario in banks.
A large cross-section of the Indian banks has done reasonably well in managing their loan portfolio and could improve on their delinquency ratio. Thus barring SBI, the NPA position of Indian banks was not alarming in 2010-11.
Having said that, the developments in the NPA space would be interesting to watch in 2011-12, when banks migrate to a system-driven recognition of NPAs and the interest rates are likely to remain at elevated levels.
(The author is Chief Economist, Bank of India. The views are personal.)