Rating Agencies See Bank NPA Levels Rising in FY11    
Industry News

Source : Economics Times

MUMBAI: Rating agencies expect FY11 to see a rise in bank non-performing assets (NPA) — loans where the borrower does not pay interest for over three months. Two reports in the past one week, one by Care Ratings and another by Fitch Ratings, highlight this possibility.

A report by Care Ratings released this week attributes this to restructured assets slipping into NPAs. It said that, “Assuming that 15% of the restructured assets get converted into NPAs in FY11 in addition to the normal system NPAs, this ratio is expected to approximately touch 3.5% for FY11.”

Fitch, in its recent report, has said it expects the gross NPL ratio for the Indian banking system between 3.2% and 3.5% at March 2011, up from 2.5% at March 2010. According to Fitch, “increased NPLs would primarily be from corporate lending, including restructured loans. As this increased NPL ratio on a higher loan base, in effect, this translates into a doubling of the absolute gross NPL amount between March 2009 and March 2011.”

Care Ratings has said managing credit growth and asset quality while sustaining earnings growth would be key challenges for the banking industry. “The scope for significant, across the board treasury gains could be limited in the medium term, given the hardening interest rate scenario. Increase in NPA provisioning and rise in slippages in the restructured assets could temper profits for banks,” it said (especially PSU banks).

A study of 32 banks — 25 public sector and seven private banks — by Care Ratings note that in absolute terms, gross NPAs for the selected banks as on March 31, 2010, increased by 25.3% to Rs 71,604 crore, with public sector banks accounting for a large proportion of the same. The overall gross NPA ratio for PSU banks was influenced by increase in slippages in Bank of India , IDBI, IOB and SBI , which together accounted for almost 60% of the rise in total Gross NPAs. The NPA ratios for private sector banks were influenced by ICICI Bank figures, excluding which gross and net NPA ratios stood at 1.61% and 0.46% as on March 31, 2010. Private Sector banks reported a good 7.4% increase in Provision Coverage.

Among the two factors that will impact bank profitability in FY11 would be the new format of computing interest rates on savings account balances and the introduction of the base rate system.

From April 1, 2010, banks will start computing interest payable on savings bank accounts daily. Till lately, banks have been paying interest at 3.5% on the lowest minimum balance kept in the savings account between the 10th and the last day of the month. The impact of this move will depend on the composition of deposits in the bank and will be visible from the first quarter of FY11, Care said.

As for the new method of calculating the benchmark lending rate to the base rate system, it does not expect these guidelines to have a huge impact on the NIMs of various banks.

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