Loan book quality of banks deteriorates

Moderating economic activity and high interest rates have eroded the ability of borrowers to service debt. This has resulted in mounting non-performing assets (NPAs) and restructured assets.

NPAs, as a proportion of advances, was the highest in six years towards the end of March 2012.

This is expected to worsen further by the end of this fiscal year. The NPA ratio (the ratio of loans accounts which have defaulted on interest or principle beyond 90 days to the total bank loans) of Indian banks, as of March 2012, was at 2.94 per cent.

After provisioning for some of these bad loans, the net NPA ratio works out to 1.24 per cent of the total loans.

The actual NPA picture would have been worse had banks not resorted to major loan restructuring and loan write-offs.

Smaller accounts turn NPAs

While the larger companies managed to restructure their borrowings by projecting improved prospects in the long-run, the SME and agriculture segments could not do the same. Therefore, their NPA ratios witnessed a sharp jump, rising by 1.2-1.3 percentage points in the year ended March 2012.

On the other hand, the restructured loans of large accounts rose by 2.7 percentage points, thereby managing to avert loans from falling into the NPA category. Aviation, State electricity boards, textiles, telecom, shipping, power and steel were the top sectors that had higher proportion of restructured loans, according to the RBI.

PSBs, the most vulnerable

Cumulatively, the standard restructured loans and NPAs of the banking system, as of March 2012, account for 7.6 per cent of the total advances. This proportion is rising at a faster pace as the system’s loan growth is moderating, but problem loans continue to be on the rise.

Even during the earlier periods when the NPA ratio moderated, aggressive growth in loan book led to fall in NPA ratio rather than absolute fall in NPAs.

Public sector banks, which account for close to three-fourth share in advances, have seen their bad loans proportion rising sharply last year. The gross NPA ratio, as of March 2012, was at 3.2 per cent, up from 2.3 per cent in the preceding year. New private banks and old private banks, on the other hand, have seen their NPA ratios moderating during this period.

Not only is the NPA picture for public sector banks looking bad, the restructured asset proportion is also on the rise. As of March 2012-end, the standard restructured loans for the public sector was at 5.9 per cent of the standard advances (up from 4.3 per cent the preceding year). The stressed assets, therefore, in the case of public sector banks is 9.1 per cent of the total advances.

Higher provisioning

Given the RBI’s estimate that 15 per cent of restructured assets may actually slip into bad loans, the NPAs from restructured loans may add another 90 basis points to the gross NPA of public sector banks. This would take the NPAs to more than 4.1 per cent for public sector banks. The provision coverage (the provisions set aside to minimise the impact on earning in case the NPAs are completely written-off) of public sector banks would, thus, fall from 53 per cent to 44 per cent of gross NPAs, increasing the vulnerability of public sector banks.

Stressed assets

The NPA ratios of public sector banks have risen by another 35 basis points in the first quarter of June 2012. Given that the restructuring pipeline hasn’t ended, there may be higher stressed loan assets .

The RBI’s annual report points out that if GDP growth falls below 6 per cent, inflation remains above 9 per cent and gross fiscal deficit rises to 6.5 per cent in 2012-13, gross NPA ratios are expected to increase to 3.7-4.1 per cent at the end of the year. Added to this, Crisil estimates that restructured assets may rise to Rs 3.25 lakh crore by March 2013 from the Rs 2.18 lakh crore as of March 2012.

Assuming credit growth of 17 per cent, the restructured loans, as a proportion of total loans, will go up to 5.9 per cent. With 4.1 per cent gross NPAs and 5.9 per cent in restructured assets, the overall stressed loans may reach 10 per cent. Public sector banks may continue to be worse-off.