Bad loans are no crushing worry for private banks

Despite the NPA (non-performing asset) bug biting the banking industry on the whole, private sector banks seem to have done a better job of wriggling out of the stress arising from the slowdown in the economy.

Between March 2011 and September 2013, the ratio of gross NPAs to gross advances of public sector, old private sector and new private sector banks put together, rose rather sharply from 2.4 per cent to 4.3 per cent.

While the share of the public sector banks in incremental advances between end-March 2011 and end-September 2013 was 76 per cent, their share in the increase in absolute NPAs was 96 per cent.

According to an Assocham study, restructured accounts have grown at a compounded annual growth rate of 47.86 per cent in public sector banks.

The corresponding figures for private sector banks are 8.12 per cent, suggesting that private banks are less affected.

Nikhil Shah, Senior Director, Alvarez & Marsal (A&M) India, which specialises in financial management of troubled firms, says, “Private banks are relatively quicker to respond, and their monitoring processes are better managed in terms of using technology to track accounts and detect early warning signals.”

One of the reasons why private banks have relatively less bad loans vis-à-vis public sector banks is that they don’t face Government pressure to lend to the infrastructure sector.

Project delays In the last two years, major infrastructure projects were put on hold due to delays in clearances and policy decisions leading to increase in input costs and delayed cash flows.

In January, Chanda Kochhar, MD and CEO, ICICI Bank, told Business Line that the bank focuses on being proactive in monitoring the composition of assets, and on being very selective in making credit decisions.

“We look at how the environment is changing, where the project approvals are placed, what it means to our clients, do we need to tighten the security structure, or do we need to move out of certain loans, what we need to do to save the loan quality,” she had said.

Further, banks are also focusing on aggressive recoveries from their clients.

Parthasarthi Mukherjee, President, Corporate Banking and International Business, Axis Bank, said, “We have a set of people who constantly engage with the clients (for recoveries). Bulk of the stress has been due to delay in policy decisions, which have held up payments. We are hopeful of this getting resolved with a stable, new Government.”

According to an official of a private sector bank, bankers are in a dilemma while selling assets as some of them do not fetch good prices in a slowing economy. “We do not know how the market price will move. Hence, we need to take a call on whether to wait or sell it right away,” the official said.

Retail growth Also, banks such as ICICI Bank, HDFC Bank and Axis Bank have been focusing on key parameters — net interest margins, fee income growth and cost-to-income ratio.

For these private banks, retail accounts constitute almost 30 per cent of their total loans and advances, helping them maintain healthy growth in profitability and fewer bad loans.

According to analysts, continuity of top management, lower asset quality issues, adequate capitalisation, and the ability to capture market share from state-owned banks due to superior services have kept private sector banks’ profitability intact.

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