For the 20 banks that have declared their September quarter earnings, bad loans rose sharply in the past three months. Collective gross non-performing assets (NPAs) for this set of banks rose by Rs.7,219 crore, or 14.3%. The run rate of bad loan accumulation was sharper than in the June quarter, when gross bad debts rose by Rs.3,340 crore, or 7%.
The main culprits, as has been the case in the past several quarters, were state-owned banks. Punjab National Bank saw its bad loans rise by Rs.4,035 crore, or 40%, in the past three months. Bank of Baroda saw bad loans increase by one-tenth in the September quarter and Indian Overseas Bank’s rose by one-fifth.
But these were the outliers. Even if the numbers of these three offenders are excluded, bad loans for the remaining 17 banks rose by Rs.1,737 crore in the September quarter, more than the Rs.728 crore slip seen in thee months ended June.
As the Reserve Bank of India data shows, the gross NPAs of the Indian banking system (as a percentage of gross advance) during the fiscal year that ended in March 2012 (FY12) were the highest in the last six years.
An even bigger concern is the rising threat of loans getting restructured as high inflation and interest rates impact demand and reduce the pricing power of the corporates. FY12 saw a massive spurt in restructured loans, both at an absolute level and as a share total loan, as corporate cash flows have been affected drastically.
Restructured loans refer to those that cannot be recovered or serviced as per their schedule and the lenders are, therefore, required to dilute the terms under which the loans were originally sanctioned, which may include lowering of interest rates, extension of tenure or both. India’s Rs.75 trillion banking sector has witnessed a surge in the amount of restructured loans in stress-ridden sectors in the June quarter, a large chunk of which could turn bad if the growth momentum does not pick up in Asia’s third largest economy.
The total amount of loans restructured by Indian banks under the corporate debt restructuring (CDR) mechanism crossed a staggering Rs.1.68 trillion, on a cumulative basis, on 30 June, registering an addition of about Rs.17,957 crore in the three months since April. The actual figure of restructured assets in the banking system, however, could be much higher as lenders often execute bilateral loan recasts on a case-by-case basis.
This addition is significant as in the whole of the last fiscal year, banks restructured Rs.40,000 crore of loans through the CDR route.
Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled during the same period. India’s biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans. According to a recently published Credit Suisse Group AG report, 10 large industrial houses account for 13% of total assets financed by the Banking system, which means that bank lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the services sector while 1.45% are from the agricultural sector.
1. Economic slowdown - The global economy is still in the throes of an economic crisis that is looming large both in the US and Europe. There is a general slackening of domestic economic activity in India both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default on their loans. There is a groundswell of expert opinion in India that NPAs are more an outcome of economic factors rather than any internal systemic failures.
2. High interest rates - It is a known fact that interest rates have been revised upwards, 10 times in the past two years with a view to curb inflation. High interest rate increases the cost of funds to the credit users and has a debilitating effect especially on the repayment capacity of small and medium enterprises. Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults.
3. New reporting system - Indian banks are to report NPAs from April 2012 in a computer recognized / identified format. It is stated that almost 90% of all banks' loan portfolio is under the computerized system of NPA reporting or system based reporting. The discretion of bank managers in classifying assets according to their local judgment is eliminated. This change in reporting pattern makes identification of NPAs a machine driven objective activity. However, credit risk analysis does have a subjective and judgmental element to it.
But, unfortunately like two sides of a coin, this system does not taken into account the difference between a willful and a victim.
4. Aviation sector - The Indian banking system has a total exposure of around Rs. 40,000 crores to the ailing aviation sector. SBI alone has an exposure of 5,000 crores to the aviation industry. It is common knowledge that many airlines are either in the red or marginally profitable. According to an RBI report, nearly three-fourths of the top Banks’ loans to the aviation sector are either impaired or restructured. Kingfisher airlines and Air India have been the significant aviation borrowers whose performance is below par.
5. Malintentions, Apathy & Red Tape - In a published report, RBI attributes the rise in NPAs of both public and private sector banks to diversion of funds from the original purpose for which they were granted, as well as willful default or misappropriation of funds by the borrowers. While that is tru, inefficient management and strained labour relations have also contributed. Sometimes the banks themselves are to blame.- delay in loan disbursement can throw a project off track and can have a cascading effect on its viability and capacity to repay. Banks have also been known to take comfort in collateral, and hence not follow up diligently enough on dues. Were the market value of the collateral to drop, there is a immediate impact on the quality of the related loan asset. There is also the age old result of political & monetary influence which unfortunately is too common in India.
Unfortunately, signals emanating from the power and telecom sects are not very encouraging and could further accentuate the problem of asset impairment.
Impact of rising NPAs
The health of a bank is reflected not only by the size of its balance sheet but also on the return from its assets. NPAs generate no interest income for the bank; the bank is required by law to provide for future loan losses arising out of its bad assets (at a coverage of 70%) out of current profits. Banks can no longer account the interest on NPA loans as income unless and until it is paid by the borrower. This not only affects profitably but also liquidity because now, banks have fewer resources to lend out or recycle.
Higher NPAs degrade a bank's credit rating, lowering its credibility as well as its ability to raise fresh capital.
As per law, every bank must maintain a Capital Adequacy Ratio (CAR) which is the ratio of total capital to risk weighted asset, of 9% (10% for new private banks) or higher. As NPAs go up, so do the aggregated risk weighted asset, forcing the bank to allocate further capital in order to maintain the ratio. Today, commercial banks are struggling to meet the CAR ratio.
Measures to control NPAs
Entire banking segment as well as the Government are aware and concerned about the situation. Earlier this year, the then finance minister voiced his concern about the worsening quality of assets in the domestic banking sector. So efforts are on to ensure that control through the guidelines issued by RBI in the form of objective policy of income recognition, realistic repayment schedules based on borrowers actual cash flow at the time of sanctioning of loan, appropriate credit assessment and risk management mechanism etc.
Conclusion
S&P, the rating agency, states that one of the redeeming features of BRIC countries' banking system, including India, is the predominant Government ownership of banks. This factor gives them resilience as the Government could bailout banks in distress. Another contributing factor to rise in NPAs is the corporate debt restructuring that was witnessed in sectors like energy, telecom etc due to high interest rates, volatile currency and commodity markets. The implementation of Basel III norms are to commence in 2013 and recapitalization is mandatory for many banking institutions. Thereby, mounting NPAs are unlikely to have a debilitating impact on the BRIC banks. In summary, as stated by Finance Minister P. Chidambaram, the problem of growing NPAs in Indian banks is marginal in nature and the impending economic recovery would certainly arrest this trend.
http://www.infosys.com/finacle/solutions/thought-papers/Documents/non-performing-assets-indian-perspective.pdf
http://www.dsij.in/Research/Blog/TabId/806/PostId/89/Non-Performing-Assets-in-Indian-Banks.aspx
Simply, NPA designates the amount of loan that was not refunded by the client. An asset becomes NPA (non-performing) when it ceases to generate income for the bank.
ReplyDelete