The high interest rate scenario and the slowdown in credit offtake, coupled with the overall slowdown in the economy, has impacted the asset quality of banks in the country. Most banks have reported a rise in gross and net non-performing assets (NPA) since the beginning of this fiscal. What more, banks are expecting slippages (fresh accretion to NPAs) in such sectors as infrastructure, power, telecom, textiles and steel.
The Financial Stability Report, recently released by the Reserve Bank of India, indicates that the asset quality of scheduled commercial banks has deteriorated, with gross NPAs increasing to 2.8 per cent as on September 2011, against 2.3 per cent as on March 2011, and net NPAs inching up to 1.2 per cent (0.9 per cent) during the similar period. The slippage ratio also increased, from 1.6 per cent to 1.9 per cent between March and September 2011.
According to Mr S. L. Bansal, executive director, United Bank of India, there has been a 20 per cent rise in interest costs on account of the almost 325-basis-point hike in key policy rates by the central bank over the last 14 months. This has affected the viability and profitability of various projects.
Affected sectors
“Certain sectors like infrastructure and power are also confronted with the issues of environment clearance and land acquisition. All this, coupled with the overall slowdown in the economy, has taken a toll on the repayment capacity of borrowers, affecting the asset quality of banks,” Mr Bansal told
The year-on-year growth rate of non-performing assets, at 30.5 per cent at end September 2011, was higher than the credit growth of 19.2 per cent. Slippages too outpaced credit growth and grew at 92.8 per cent as at end September 2011, the RBI report said.
The growth rate of NPAs during the first six months of this fiscal at 25.5 per cent is more than triple the average growth rate of 7.4 per cent in the first half years during 2006-2011.
Priority sector, retail, real estate and infrastructure together accounted for about 85 per cent of the total gross NPAs in the system as on September 2011. The contribution of priority sector and retail to aggregate NPAs at 48 and 23 per cent, respectively, was lower than their contribution to total advances of the banking system at 31 and 19 per cent, respectively. The retail sector saw an increase in NPAs after a decreasing trend since March 2010, the financial stability report said.
The migration of banks to system-driven identification of bad loans has also caused a spurt in the rise of NPAs. “Most banks have moved to the system-driven identification of NPAs and this has led to the surfacing of smaller advances particularly in the SME and agricultural sectors. This has caused an overall increase in the bad loans,” said Mr A. K. Bansal, executive director, Indian Overseas Bank.
Restructured assets
This apart, some of the assets which were earlier restructured, have also slipped into NPAs. A senior bank official at ING Vysya Bank said, “Some of the restructured assets especially under textile sector are showing stress during the current year probably resulting in NPAs, which is a matter of concern for us. However, at ING Vysya Bank we have not suffered much increase in NPA from restructured assets so far.”
Allahabad Bank has not witnessed a significant rise in NPAs so far during the third quarter. “There may be some cases for restructuring but overall companies are sound so we do not anticipate any major issue,” Mr J. P. Dua, chairman and managing director, Allahabad Bank said.
The gross NPA, as a percentage of total advances, which currently stands at 2.8 per cent, is likely to inch up to 3 per cent by March 31, 2012, said Mr Karthik Srinivasan, Senior Vice-President, Co-Head, Financial Sector Ratings, ICRA Ltd. “Given the operating environment and interest rate situation, there is likely to be further stress in banks' exposure to sectors like infrastructure, power, airlines and microfinance institutions. There could be more slippages in some of these accounts thereby leading to a further rise in NPAs,” Mr Srinivasan said.
State Bank's gross slippages excluding those from restructured accounts during the second quarter of this fiscal were to the tune of Rs 6,238 crore. Slippages were from the corporate, small and medium enterprises and agricultural sectors.
Power and Telecom
The RBI's financial stability report suggests that a further slowdown in growth rate could impact the asset quality and the impact could be much pronounced in the power sector, especially due to the legacy losses in State electricity boards.
The impairments and restructuring have increased in the power and telecom sector as at end June 2011 with restructured accounts in the two sectors together constituting 8.5 per cent of total restructuring in the banking sector, compared with 5 per cent as at end March 2011.
“The risks that banks currently face on account of their exposure to power sector are: rising losses and debt levels in State electricity boards (SEB), and the shortage of fuel availability for power generation. Against this backdrop, lenders are cautious in extending loans to the sector,” the report said.
In the light of the above situation, gross NPAs could rise to 4-5 per cent by March 2013, said Mr Manek Fitter, partner, financial services, Ernst and Young. “This will call for huge provisioning by banks, thereby impacting their bottomline,” he said.
Provisioning costs
Though it is difficult to estimate how much banks will have to set aside as provisioning towards the rise in NPAs, a senior official said that there could be a general increase of about 25 per cent in provision cost towards additional NPAs. Mr M. D. Mallya, Chairman and Managing Director, Bank of Baroda, said, “There could be a marginal rise in NPAs moving forward, but Indian banks are adequately strong and well capitalised to absorb it.”
Indicating a dent in profitability, the year-on-year growth in earnings before provision and taxes of banks came down from 24 per cent in September 2010 to 10 per cent in September 2011, while profit after tax increased by 2 per cent as against 31 per cent growth in September 2010.
However, the negative on asset quality could be offset by likely gains in treasury portfolio of banks during the next few quarters. “The interest rates might soften a bit next year and there could be some gains on banks' investment portfolio. So the negative on asset quality will be offset by treasury gains,” Mr Srinivasan of ICRA said.