Sticky assets cut Rs 53555 cr from banks' bottomlines

Non-performing assets (NPAs) have caused a Rs 53,555 crore reduction in the net profit of commercial banks in the last seven years, according to Asset Reconstruction Company (India) Ltd (Arcil).

The loss of net profit on account of NPAs is 45.93 per cent of the net worth of commercial banks of Rs 1,16,589 crore as on March 31, 2004. Arcil, in its January 2005 newsletter, has described this loss a "destruction of shareholder value".

Arcil has also taken into account government's support through Rs 20,000 crore recapitalisation bonds to weak banks and Rs 9,000 crore stressed asset stabilisation fund to Industrial Development Bank of India (IDBI) to arrive at the loss of cumulative net profit.

Arcil said the decline in NPA ratios reported by banks have been only a result of increase in total advances and writing off of around Rs 10,000 crore of NPAs every year.

Though the gross NPA ratio has fallen from 14.4 per cent in 1997-98 to 7.2 per cent in 2003-04, NPAs in absolute terms have risen from Rs 50,815 crore to Rs 64,898 crore.

Similarly, the net NPA ratio has dropped from 7.3 per cent in 1997-98 to 2.9 per cent in 2003-04. The net NPAs of banks in absolute terms have remained rigid.

Net NPAs at end-March 2004 amounted to Rs 24,617 crore compared with Rs 25,734 crore at the end of 1997-98. Banks and financial institutions' attempts to tackle NPAs have so far not proved to be very successful.

Of the 63,600 cases filed with debt recovery tribunals (DRTs) for recovery of Rs 91,926 crore, 27,956 cases involving Rs 25,358 crore have been decided.

But the amounts recovered totalled just Rs 7,845 crore till June 30, 2004. NPA cases handled through the SARFAESI Act have also met the same fate. Of the Rs 19,744 crore stuck in 61,263 cases, only Rs 1,748 crore have been recovered.

Arcil says the experience gained in acquisition of NPAs indicated a moderate response to transfer of assets from banks.

The book values of banks/financial institutions are often higher than the price offers, blocking decision to transfer or rejection of price offers of Arcil. Arcil's price offers are based on "realistic estimates of recovery" and require banks to make immediate write-offs.

It felt banks would stand to gain if NPAs are put on recovery path in the early stages either through asset reconstruction companies or other means as NPAs lose value over time.

Arcil hopes RBI's recent guidelines on provisioning of doubtful assets and restriction on dividend would provide greater urgency to banks and financial institutions to sell NPAs to asset reconstruction companies (ARCs).

Banks have to define the level and milestones for cleaning their balance sheets by recognising the value erosion in their NPA portfolios over and above the regulatory minimum.