After witnessing a substantial growth in bad loans in 2009-10 due to economic slowdown, Indian banks are hoping for better days ahead, due to the improved economic climate, credit pick-up and better repayment behaviour.
Public sector banks, which have over 70 per cent share in the business, saw a big increase in bad loans during the past year.
State Bank of India, the largest of the PSBs, saw the highest growth in its non-performing assets (NPAs) amongst listed banking entities in 2009-10, as the economic slowdown and payment defaults put a strain on the asset quality. For SBI, the country’s largest lender, its gross NPAs rose by Rs 3,820 crore to Rs 19,534 crore by the end of March. Bank of India's bad loans almost doubled to Rs 4,882 crore in the 12 months ending March 31. 2010.
According to rating agency Icra’s estimates, outstanding gross NPAs of listed banks grew by over Rs 14,500 crore in 2009-10 to cross Rs 76,000 crore. In per cent terms, gross NPAs inched up to 2.3 per cent from 2.2 per cent at the end of March for the sector.
Private banks did better. Their outstanding bad loans either remained stable or saw only a marginal increase. ICICI Bank and HDFC Bank showed a marginal drop in NPAs. In case of ICICI Bank, gross bad loans declined to Rs 9,480 crore at end-March, from Rs 9,649 crore a year before. For HDFC Bank, they were down to Rs 1,816 crore from Rs 1,988 crore.
Much of the addition was seen in the second and the third quarter of 2009-10. Gross bad loans grew by Rs 5,000 crore in each quarter. The pace of addition slowed to just Rs 2,000 crore in the fourth quarter ended March, according to Karthik Srinivasan, co-head of financial sector ratings for Icra.
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Corporate and small and medium size enterprises had a large share in the slippages. In addition to the export-sensitive sectors of textiles and gems & jewellery, steel and oil exploration and telecom also showed stress.
Trimming NPAs not easy
Many banks did make efforts to trim their NPA levels by selling old NPA accounts, settlements and recoveries. But, with limited success.
“There is quite a gap between the price asset reconstruction companies are ready to pay for a lot (loans) on the block and what we (banks) expect,” said a senior official with Central Bank of India. It had conducted two auctions, but only one fructified.
Similarly, Indian Overseas Bank, the Chennai-based public sector one, had plans to sell NPAs for Rs 954 crore, involving 61 accounts, in the fourth quarter. It did not materialise.
However, bankers say the worst is over and the pace of additions to NPLs are expected to be less than what was seen in the past 12 months.
Viren Mehta, partner (financial services) with Ernst & Young, says “the big bump (huge additions in NPAs) that we saw in 2008-09 and 2009-10 is behind us”.
A senior Bank of India official said, “We do not expect in FY-11 a repeat of the huge additions (absolute) to bad loans that happened in 2008-09 and 2009-10. The business environment is looking up, which will improve the repayment capability of some NPA accounts. Also, some loans for which full provisions are made would be written-off from the books.”
Concern on restructured debt
The logic of better days has substance. But, it does not mean the road ahead is smooth. Banks have to be watchful of the loans restructured under RBI’s special dispensation in 2009. At present, these are treated as standard assets on the books, beside enjoying a year’s moratorium on repayment. The moratorium ends on June 30.
Commenting on SBI’s restructured asset portfolio, Moody's, the global rating agency, said it had a negative view, especially on that done in the fourth quarter. SBI recast additional loan worth Rs 3,800 crore during the quarter, bringing the total of restructured loans to Rs 26,800 crore, comprising 4.2 per cent of total loans as of March.
Overall, NPAs are expected to stabilise and their proportion expected to come down, said SBI’s chairman, O P Bhatt.
Further slippages from the recast portfolio and new NPAs would pose a challenge of higher burden in making provisions. Most banks are already meeting RBI’s norm of 70 per cent portfolio coverage ratio (though they have time till September). They’ll have to pay out more to maintain the norm when an account turns into an NPA.