By : Anup Roy & Ravindra Sonavane; Livemint.com, India
Mumbai: Indian banks’ bad debts are rising as companies have started feeling the pinch of high interest rates. Banks may also have to restructure loans that borrowers are finding difficult to service because their businesses have been affected by a slowing economy.
The growth in non-performing assets (NPAs) as a percentage of banks’ loan portfolio was almost at a five-year high in the April-June quarter and analysts said it could rise even further because there is a strong chance that interest rates may harden in the absence of any sign of inflation coming down.
When money becomes costlier, incomes of companies go down as demand from consumers slows and, at the same time, their interest burden also goes up, leading to incidents of loan defaults.
In the April-June quarter, the banking industry’s gross NPAs rose by 7.64%— from Rs. 60,685 crore in the January-March quarter to Rs. 65,318 crore. This has been the highest growth of bad loans in a quarter since July-September 2006.
The growth in net NPAs, after provisioning, in the April-June quarter was 9.62%, at Rs. 27,311 crore, up from Rs. 24,914 crore in the previous quarter.
For this analysis, the financials of 35 of 40 listed banks have been taken into account. State Bank of India (SBI), the nation’s largest lender, is yet to announce its June quarter earnings and comparable figures for past 20 quarters are not available for four banks. In the January-March quarter, SBI’s gross NPAs grew to 3.28% from 3.17% in the previous quarter.
Bankers are blaming the shift to a system-based recognition of NPAs from manual one for the sudden rise in bad assets. Following a government directive, all state-owned banks are required to calculate their NPAs, generated by systems, from the current fiscal. Till recently, this calculation for most banks was done manually at the branch level and was subject to the discretion of managers.
“We may see more NPAs in the September quarter as we move 100% of our loan portfolio to the system-generated NPA recognition regime,” said Bank of India chairman and managing director Alok Kumar Misra. Currently, 90% of the bank’s loan book has moved to system-based recognition of NPAs.
Analysts are not convinced. “It’s the general environment; system-based NPA is just putting additional pressure to it,” said Krishnan A.S.V., analyst at Ambit Capital.
“Earlier we were not anticipating this, but looking at the first quarter numbers, we need to revisit our NPA assumptions,” he added.
The economic environment could get worse. The Prime Minister’s economic advisory council on Monday cut its growth forecast for the economy to 8.2%, a significant reduction from its February projection of 9%.
“The interest rate is high and a lot of companies, particularly SMEs (small and medium enterprises), are finding it difficult to service their loans. A lot of them are going for restructuring (of their loans),” said Misra.
In absolute terms, Bank of India’s gross bad debts rose 20.36% in the April-June quarter from the previous quarter. In percentage terms, its gross NPAs rose to 2.69% of its total advances from 2.23%.
“Lending rates depend upon our ability to mobilize funds. If our cost of funds become dearer, we will have no option but to pass on the cost to the borrowers. This is real transmission of policy prescription that is happening,” said M.D. Mallya, chairman and managing director of Bank of Baroda, who also heads industry lobby Indian Banks’ Association.
Apart from Bank of India, Central Bank of India, Federal Bank Ltd, United Bank of India, UCO Bank, IDBI Bank Ltd, Vijaya Bank and three SBI associates have shown substantial rise in their NPAs.
Overall, two out of every three banks covered have shown a rise in their NPAs. Two banks had the same NPA level as they did the previous quarter.
According to Mallya, the banking industry’s asset quality is a function of inflation. If inflation comes under control, the Reserve Bank of India (RBI) will not need to hike rates.
“Given the prevailing macroeconomic scenario, it is a real challenge to maintain the asset quality. However, by March, inflation should come under control and we could see economy picking up again... As of now, there is some stress on the asset quality, but that is not alarming,” he said.
Union Bank of India’s gross NPAs rose from 2.37% in the January-March quarter to 2.57%, but its chief M.V. Nair is hopeful that things will change after the July-September quarter. According to him, banking is the lead indicator of an economy and is the first to be impacted by economic cycles.
“After March, NPAs will go down rapidly,” he said.
Analysts aren’t as sure.
“First quarter (of a fiscal year, the April-June quarter for most Indian companies and banks) is generally weak and a problematic quarter and NPAs do rise in this quarter, but we see fundamental problem in asset quality in a slowing economy,” said Santosh Singh, analyst at Espirito Santo Securities.
Singh does not rule out the possibility of RBI allowing another round of restructuring of bank loans as there is a strong chance that many companies, especially SMEs and infrastructure firms, will face problem in a slowing economy and high interest rates.
RBI had allowed such restructuring in 2009-10 to help companies tide over the impact of the global financial crisis.
“In 2008, it was sudden, but the domestic economy was strong and interest rates were coming down. Now the situation is reversed and we are a little concerned about asset quality deterioration,” Singh added.
RBI has raised its policy rates 11 times since March 2010 to rein in persistently high inflation and may not have yet reached the end of the rate tightening cycle.
Ananda Bhowmik, senior director, Fitch Ratings India, said: “The cyclical headwinds that the banking sector faces are quite evident. However, our assumption is that in 2011-12, the impact will not be significant.”
According to him, certain sectors such as airlines and real estate are facing liquidity problems and if the assets become NPAs, there will significant impact on the banking sector.