DNA: Mumbai: Tuesday, February 09, 2016.
The net
non-performing assets (NPAs) of state-owned banks gross NPAs less provisions at
Rs 1.74 lakh crore at the end of September 2015 is equal to almost a third of
their total net worth. In other words, if banks have to fully provide for all
their bad debts, it would wipe out 33 per cent of their paid-up capital plus
reserves and surplus.
In response
to an RTI query by The Indian Express, the Reserve Bank of India disclosed that
29 public sector banks wrote off a combined Rs 1.14 lakh crore of bad debt
between 2013 and 2015. This is more than one-third of the total gross
non-performing assets of Rs 3.06 crore for public sector banks.
Looking at
gross NPAs in isolation doesn’t give the full picture. Banks set aside money in
the event of default or non-payment these are called provisions. The net NPA
numbers hide some unpleasant details.
One, for some
banks such as Indian Overseas Bank, they make up as much as 83.3 per cent at
the end of the September quarter, according to Capitaline database. For 16 out
of 25 public sector banks for whom data is available, this ratio is more than
33 per cent. The average for private sector banks is 4.9 per cent.
Under the
fractional banking system, banks need a certain amount of capital to lend. If a
large portion of its equity capital and reserves are wiped out, then a bank
will not be able to lend freely, or it will have to wait for capital infusion
from the government, which might not be forthcoming in times of a fiscal
squeeze.
Two, banks
have been able to reduce their NPA numbers by not only writing off assets, but
also by restructuring or refinancing them. While this might save them
temporarily from being classified as bad loans, they might turn irrecoverable
if investment demand doesn’t revive.
“For banks,
this is just the tip of the iceberg. It is going to get much worse. Especially
when some of the big companies in the power and infrastructure sector face more
problems,” Hemendra Hazari, an independent analyst, said.
After an
asset quality review undertaken by the RBI in December, bad debts of some
private sector banks rose sharply. For instance, ICICI Bank’s gross NPA jumped
Rs 5,291 crore during the December quarter, the highest in nearly five years
and that of Axis Bank increased by Rs 1,273 crore. Most large PSU banks are yet
to report their December quarter numbers and it is only to be expected that
their bad debt numbers will go up, experts said.
According to
rating agencies, loan write-offs are likely to rise in the coming quarters.
Rajat Bahl, Director, CRISIL Ratings, said, “Loan write-offs by banks in India
have shown a rising trend in the last few years. They reached a level of Rs
50,000 crore for the public sector banks in 2014-15. Another Rs 25,000 crore
were written off in the first half of the current financial year, 2015-16.
While the pressure on banks to write-off will continue, the extent of
write-offs is unlikely to rise significantly due to two reasons first, PSBs
usually write-off to the extent of cash recoveries that they have made during a
year, and the recoveries are unlikely to be buoyant due to continued stress in
the corporate sector. Second, their ability to take large write-offs will also
be constrained by their weak profitability.”
“The quantum
of provisions for loans that banks need to make, however, will continue to be
high, reflecting the ongoing asset quality challenges,” Bahl said.
Vibha Batra,
Group Head Financial Sector Ratings, ICRA, said, higher write-offs are on
account of around 3.5 times increase in the pool of gross NPAs to over Rs 3
lakh crore, even though write-offs as per cent of opening gross NPAs have
remained in the range of 20-23 per cent. Considering further likely increase in
gross NPAs and large stressed accounts, write-offs in absolute amount may
continue to increase over next 12-18 months.
“With bad
loans increasing over time, banks have been working towards lowering the same.
While better credit practices and economic stability helps in controlling
incremental NPAs, banks have also been writing off bad assets to strengthen
their books. This in turn puts pressure on the profit and loss account, but can
be considered to be necessary as a prudent practice. This will, to my mind,
continue to increase until books are put in order,” said D R Dogra, Managing
Director & CEO of rating agency CARE.