Banks must watch asset quality closely, cautions RBI

Banks need to step up efforts to resolve their existing non-performing assets and tighten their credit management systems, said the Reserve Bank of India in the Report on Trend and Progress of Banking in India 2010-2011 .

The concern is that the recoveries have not kept pace with slippages since 2007-08. “Rising interest rates and substantial amount of restructuring done during the crisis period, if not done with due care, are likely to put further pressure on asset quality of banks,” the RBI said.

The central bank has also warned that the asset quality of banks needs to be closely watched in the changing interest rate environment as the sticky loan portfolio of small and medium enterprises might rise.

Concerns remain

The gross NPAs to gross advances ratio declined to 2.25 per cent in 2010-11 from 2.39 per cent in the previous year. The gross NPAs, however, increased in absolute terms in 2010-11 over the previous year, though at a lower rate.

However, there are concerns like the high write-off ratios (which implies foregone profitability in an attempt to clean balance-sheets) and that the restructured accounts could again fall back into the NPA category.

In 2010-11, the banking sector wrote off almost 10 per cent of the outstanding gross NPAs (as at end-March 2010).

The improvement in asset quality was visible in both private sector and foreign banks. Public sector banks, however, witnessed deterioration in asset quality in 2010-11 over the previous year, mainly due to the deterioration in the SBI group. Foreign banks, however, registered a decline in gross non-performing loans in 2010-11 over the previous year.

The restructuring of advances undertaken by the banking sector during the recent years also helped in reducing the gross NPA ratio. At a system level, the restructured standard advances as a percentage of gross advances increased to 2.66 per cent as at end-March 2011, from 2.16 per cent as at end March 2009.

Farm sector NPA

A substantial portion of the total incremental NPAs of domestic banks in 2010-11 was contributed by agricultural NPAs, said RBI.

The agricultural sector contributed 44 per cent of the total incremental NPAs of domestic banks in 2010-11. Higher growth registered in the credit to agricultural sector (more than 20 per cent) during the last four years (2006-07 to 2009-10) might have contributed to the growth in agricultural NPAs in 2010-11 owing to the deterioration in credit quality.

The agricultural NPAs to agricultural advances of domestic banks, which declined in 2008-09 due to the implementation of the Agriculture Debt Waiver and Relief Scheme, 2008, witnessed an increasing trend thereafter.

COMMENT NOW