The end-September 2011 quarter saw a worrying decline in the performance of banks. The level of non-performing assets (NPAs) of all listed banks went up by 15 per cent over the previous quarter, the fastest quarter-on-quarter growth in five years. This marks a 33 per cent or one-third rise in six months, compared to the end of the last financial year. What is even more significant is that 97 per cent or almost the entire amount of bad loans added in the last quarter was accounted for by public sector banks. According to a study, the public sector banks added more NPAs in the last quarter compared to the entire previous financial year. It is not surprising that as a result of this downturn, the gross NPA levels (those considered non-performing and provided for but not yet written off) have gone up by 45 basis points (almost half a percentage point) to reach 2.9 per cent of total assets. This situation will not improve unless loans that have gone sour are actually written off. Once that is done, the amount of capital with banks will go down, requiring infusion of additional capital. But the government’s resources are scarce. So, if provisioning and writing off go on according to the rule book, the banks’ ability to expand their asset base will go down, since they will have less capital available with them. They would also fall foul of capital adequacy norms. So, the scenario ahead is one of banks being reluctant to make fresh loans. This will be a recipe for a downward spiral in the economy.
There are several reasons for this scenario. In a regime of rising interest rates, mandated by the banking regulator, and falling level of growth in the industrial output, firms will be stressed and their ability to maintain their commitment to banks will fall. In a situation where all banks are equally affected, public sector banks have additional concerns reflected in their poorer performance. They lend more to the priority sector, which includes agricultural and small businesses. These are more vulnerable in a slowdown. Also, the end of the last quarter marked the deadline for switching over to computerised determination of the status of assets, that is, no manual discretion in calling or not calling something non-performing. Public sector banks have been slow in switching to the process of scientifically classifying assets and this process got bunched up in the last quarter. Interestingly, the roles are now reversed between public and private sector banks, compared to 2008 when the global financial crisis hit the Indian shores. Then, it was the private banks that were lagging behind, having to pay the price for aggressively seeking business earlier. Since then they have apparently set their house in order, going by the small rise in their NPAs. Is there light at the end of the tunnel? As of now, nothing is in sight. With the economy sputtering, public sector banks, which reach all sections of society, will reflect the overall malaise.