Slow asset growth may affect NPA mgmt

The slump in demand for loans could have implications for banks in managing their bad loans portfolio. The high credit offtake and increased provisioning for bad loans had so far helped banks report lower levels of non-performing assets to advances, despite a rise in delinquencies.

"The gross and net non-performing assets (NPAs) have been coming down in percentage terms. But are they coming down in absolute terms? What happens when the high asset growth, which has kept the (NPA) percentage low, slows down, as it is slowing down now and there is no treasury income?" said O P Bhatt, chairman, State Bank of India (SBI).

Since April, banks have lent only Rs 9,132 crore compared with Rs 66,950 crore over the same period last year. On the other hand, public sector banks added Rs 2,461 crore of fresh NPAs in the first three months of the year alone. This means that the incremental NPAs to loans is substantially higher than the average NPAs.

At the end of the June quarter, the ratio of gross NPAs went up to 2.8 per cent from 2.7 per cent in the preceding quarter. The increase was the highest for new private banks, whose level of gross NPAs rose to 2.5 per cent from 2.1 per cent over the same period.

At a pre-monetary policy meeting with bankers in July, Rakesh Mohan, deputy governor, Reserve Bank of India (RBI), had raised concerns over the rise in NPA numbers. The central bank had asked for reassurance on appropriate risk management and control mechanisms at the banks.

"The surge in NPA numbers is a worry. The rise in NPAs so far had been offset by fresh advances, which has not happened this time," said a senior banker.

The rise in defaults, confined thus far to personal loans and loans to small and medium enterprises (SMEs), has spilled over to big ticket loans with banks facing increasing defaults by mid-sized corporates.

"There has been an increase in non-performing assets (NPAs) across loan portfolios, retail, SME and mid-sized corporates. These corporates had a good credit history over the last 10-20 years but over-leveraged themselves," said a senior SBI official.

In the first quarter of 2007-08, the country's largest lender added Rs 759.35 crore to its gross NPAs. The gross NPA ratio moved up from 2.92 per cent at the end of March 2007 to 3.13 per cent in June 2007.

For some banks, the defaults in home loan segment was over 4 per cent, while delinquencies for personal loans was at 10 per cent. In the SME portfolio, the NPA levels are hovering at 6-7 per cent.

"There was reckless lending by banks which has led to defaults. However, out of the Rs 398 crore of NPAs added last year, Rs 270 crore were below Rs 25 lakh loans, which are relatively easier to recover. Most were retail loans given in 2004-05," said Prakash Mallya, chairman and managing director, Vijaya Bank.