Bad loans peaking, handholding of distressed firms is on the rise

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But persistently high NPA level creating constraints for banks to cut lending rates

There is nothing so alar-ming about the burgeoning non-performing assets (NPAs) and the restructuring book of banks, as the ongoing NPA situation is mirroring the last cycle of high NPAs in FY02, when they were as high as 10.4 per cent of total bank credit. This was a period that saw severe stress in large sectors such as iron and steel.

Banks are handholding companies by restructuring their debt and bringing them back to recovery gradually. Even today, gross NPAs and restructured assets put together are close to 9.2 per cent, but the stress on asset quality is peaking.

“The profitability of scheduled commercial banks would be under increased strain during 2012-13 due to higher level of NPAs,” K C Chakrabarty, deputy governor of the Reserve Bank of India (RBI) said at the Assocham banking summit on November 21.

Gross NPAs of the banking system have increased from 2.36 per cent in March 2011 to 3.25 per cent this June. Restructured standard accounts as a percentage of gross advances have doubled from 2.7 per cent in 2009 to 5.4 per cent as of June, with substantial increase in restructuring in certain sectors. Data indicate that restructuring is largely resorted to in the case of industrial sector accounts, particularly large industries, compared with smaller borrower accounts such as agriculture, micro and small enterprises. The persistently high level of NPAs and increase in restructured accounts continue to create significant constraints on banks’ abilities to reduce lending rates, thereby, in a sense, penalising the honest borrowers.”

Total restructured assets of banks at the end of the second quarter ended September 30 stood at Rs 2,96,400 crore, or 5.7 per cent of total assets. Total gross NPAs are Rs 1,82,000 crore or 3.5 per cent of total assets. Gross NPAs of public sector banks were 3.23 per cent of gross advances at Rs 85,950 crore, while for private banks, it was 2.34 per cent of gross advances at Rs 23,235 crore.

While SBI has restructured about 3.5 per cent of its total advances, other public sector banks have restructured about 7.8 per cent of their gross advances and private sector banks about 1.5 per cent of their advances.

Karthik Velamakanni, an analyst with the UK-based investment bank Espirito Santo, said, “In comparing the current asset quality cycle with the previous cycle (FY02-FY07), one can find similarities in terms of high GNPAs in percentage terms, low GDP growth and severe stress in a large sector like iron & steel in FY02 and infrastructure at present. Since FY02, the Indian banking sector has been strengthened in terms of improved legal framework for recovery (SARFAESI Act), asset reconstruction companies, introduction of credit bureaus and far more stringent NPA recognition norms. Because of these structural improvements, GNPA per cent may not increase to the FY02 level.”

Pratip Chaudhuri, chairman and managing director of State Bank of India, said: “It is quite realistic for the finance minister to expect banks to handhold companies and the statements that banks’ asset quality is alarming go against this. It will be extremely useful if other organs of the government also have the thinking and the policies in line with what the finance minister said, because so much of assets have been created and so many jobs have been created. Unless we handhold and come down heavily on every small sign of delinquency, the consequences for the economy would be quite adverse.”

So far a significant portion of the asset quality stress is already visible, given the high level of stress in priority sectors such as agriculture, MSME, education, SMEs and mid-sized companies.

“However, large companies are yet to see NPAs, especially in stressed sectors such as power and infrastructure, which we expect to see over the next two years. So, the stress on asset quality will peak out over the next 12 to 24 months,” said Karthik of Espirito Santo.

M Narendran, chairman and managing director of the Chennai-headquartered Indian Overseas Bank, said: “Earlier we thought India is insulated from the global financial crisis, but our experience over the past two years has shown that trouble is hitting us. Our exports have slowed down and our imports continue to grow. Companies created excess capacities to meet increased demand in keeping with the expected growth in the economy, but today the demand has come down. All this has resulted in bad assets in the banking system. But we expect NPAs to peak over the next six to seven months.”

Assets under stress include loans to the aviation, power, highways, fertiliser, steel and textile sectors. All these sectors have taken to credit restructuring once, but have still not been able to turn around.

Moody’s senior analyst Vineet Gupta said: “The growing number of restructured loans add to the risks already looming over Indian banks because of the weakening economy.”

That means the capital requirement for the banking sector would have to substantially increase.

“Companies need to innovate and embrace technology to improve their productivity and efficiency so that their costs can come down, they remain competitive and continue to service their obligation as borrowers. Banks on their part must look to arrest the deterioration in asset quality by adopting better risk management practices like better credit appraisal, closer monitoring of borrower accounts, greater information sharing among banks and by carrying out elaborate viability studies before restructuring. While NPAs and restructuring of assets cannot be wished away, they need to be effectively curtailed to ensure that the lendable resources of banks are maximised,” Chakrabarty added.

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