But, banks well-positioned to absorb shock, says Crisil.
The gross non-performing assets (NPAs) of banks is projected to jump three-fold by March 2011 due to increasing defaults in payments by companies and small and medium enterprises (SMEs) due to their weak risk profile and intense pressure on operating margins.
Gross NPAs are expected to swell to Rs 1,90,000 crore (5 per cent of advances) by the end of 2010-11 from Rs 56,400 crore (2.3 per cent of advances) as on March 31, 2008, according to rating agency Crisil.
The estimates for 2010-11 takes into account the loan accounts which are being currently restructured. These accounts are treated as bad loans.
Advances have grown roughly four-fold over the past seven years to an estimated Rs 27,70,000 crore.
Loans are treated as NPAs when payments remain due for 90 continuous days. The quality of Indian banks’ assets is likely to deteriorate over the next two years due to the economic slowdown and the aging of loans (when the banks get a clearer picture on which loans are healthy or unhealthy).
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Besides the corporate segment, the retail sector, which saw first boom in lending after 2002, will also have its share in growing kitty of bad loans. However, Crisil believes that the Indian banks are well positioned with a comfortable capital base to absorb the effect of the increased NPAs.
The capital coverage for NPAs has increased sharply over the past 10 years. The ratio of net worth to net NPAs was 12.8 times at the end of FY08, against 2.2 times as of end-March 1998. Tarun Bhatia, head (Ratings), Crisil, said, “Even with the expected jump in NPAs, we project the ratio of net worth to net NPAs at 5 times as on March 31, 2011. This provides sufficient coverage for losses that might arise out of these NPAs.”
Referring to higher contribution by Indian companies, Raman Uberoi, senior director, Crisil ratings, said this asset class accounts for about 56 per cent of banks’ advances.”
The corporate loan portfolio can be broadly classified into large companies, and SMEs. In case of large companies, deterioration in debt servicing ability was initially driven by higher borrowings for funding mergers and acquisitions, and large capacity expansions.
Since a large number of SMEs are suppliers to large companies, the decline in ultimate consumer demand also affects SMEs. There revenue profiles are often concentrated towards a small number of large corporates. Also, the SMEs lack scale, which make them inherently susceptible to the effect of unfavourable economic conditions.
The deterioration in the asset quality of corporate loans will result from the increasing intensity of the demand slowdown, a lack of access to funding at reasonable rates, movements in foreign exchange rates, and the lengthening working capital cycle.
The GNPA ratio in corporate segment is projected to more than double to around 4.1 per cent by March 2011 from figure of 1.6 per cent at end of March 2008.
Referring to share of retail assets in bad loans Crisil said in the boom phase there was dilution in underwriting standards. The lax standards and the aging of loans in the portfolio after a period of rapid growth will drive delinquencies higher.
The GNPA ratio in the retail book, which constitutes more than 20 per of banks’ total advances, is expected to increase to 4.7 per cent in the next two years from 3.2 per cent as on March 31, 2008.