The Hindu Business Line : NPAs rising in retail loan segment

ACCRETION of non-performing assets (NPAs) is beginning to take place in the retail loan portfolios of banks, despite tight due diligence. High level banking sources said that most of the NPA build-up was in the sub-Rs 10 lakh bracket.

This segment included housing and auto finance, the bankers said.

Most of the increases in delinquencies were coming from the urban areas and metros where banks had aggressively built up large portfolios of retail finance. Loan delinquencies are likely to escalate as interest rates rise, they said.

For most of these loans, the repayments were due for more than 90 days. Accordingly, they said, the loans fell within the category of sub-standard assets.

Banks would have to make provisions to the extent of 50 per cent, the sources said.

Despite the fresh accretions, the overall target of containing the NPAs is not likely to be impacted.

The sources said that the entire banking sector is expected to bring down the average net NPAs down to about one per cent of the advances by the end of this financial year.

Gross NPAs that currently average around 7 per cent of advances are expected to drop, the sources said.

The bankers' optimism stems from the substantial floating provisions created out of treasury profits during the last few years. Consequently, there is considerable cushion with them, to absorb the incremental NPAs.

The bankers said that most of the public sector banks have NPA coverage ratio close to 80 per cent, almost in line with the international standards.

Besides, bankers are expected to make recoveries to the extent of Rs 400 crore each this year, which would further improve the coverage.

Already, most banks have reported a 40 per cent increase in NPA recoveries. These recoveries, the bankers said, would offset the impact of any increase in NPA during the current year.

Further, bankers said that some of the retail loans are fully backed by the underlying physical assets. With the new Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act in place, asset could be taken over to recover the loan losses. However, the bankers admitted that they are likely to suffer some erosion in the principal, even after such take-overs. This is especially in the case of auto loans due to the fall automobile prices.

When it comes to auto loan defaults, the bankers said repossession and subsequent resale would still mean the principal would be shaved by about 25 per cent. In housing loans, the losses would be negligible in view of the appreciation in the value of the assets.

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