Banks expect NPLs to rise in power, real estate: Experts

Indian banking sector is sailing through rough weather since the first quarter results announced by banks were dismal. 

The balance sheets of the banks are in a very bad shape right now.

RK Bakshi, executive director, of Bank of Baroda 

and N Narendra, chairman of Indian Overseas Bank, 

in an interview with CNBC-TV18’s Latha Venkatesh and Gautam Broker,

 spoke about the challenges the banking sector will have to face ahead.

Below is the edited transcript of the interview:

Q: When you reported your numbers, the banks witnessed fresh slippages of 0.25%, so that would be annualized 1%. There are fresh fears about coal linkages for power projects, concerns that state electricity boards (SEBs) will not buy extra power and that might leave the power companies in a bit of a spot. Do you think that you could have a couple of infrastructure loans turning bad and therefore more non-performing loans (NPLs) in that space?

Bakshi: As far as the slippage is concerned, it was quite in line with the guidance. We should not compare our standards with the international benchmark. Last year, our ratio was around 1.09% for the whole year and if it can stay within that, it should be fine. But that alone is not the number that matters. It is also important to see how the recoveries and upgradations in the NPL accounts and written off accounts happen. So, we need to see what kind of net accretion is happening.

Concerns are very valid about the coal linkages, environmental clearances, project progress, health of SEBs, but apparently many steps have been taken to resolve these issues already. We are not seeing any incidence that will turn bad this quarter, but these are longer term issues.

The power sector is considered as a backbone of industrial development in the country. Hence, issues in the power sector need to be resolved.  As far as SEBs are concerned, they are a very important segment of the distribution channel since they provide power to the end consumer.

Q: Your gross NPLs as of June 30th were Rs 3425 crore, will that increase by the end the year?

Bakshi: The NPLs have been increasing and may keep increasing if our recoveries and upgradations are not equal to the slippages. We still believe in our guidance, that the gross accretion to NPLs may not be more than 1-1.2%.

Q: What you are seeing in terms of NPLs in the power sector?

Narendra: We have given advances to very established players in the power sector and some of them have already started power production. As far as the infrastructure sector is concerned, there is no cause of any concern and around 8% of the infrastructure advances go to the power sector. However, we have not noticed any issues in the infrastructure and power sector.

Q: Tamil Nadu Electricity Board (TNEB) is one of the electricity boards, which is in greater trouble right now. What is your exposure to TNEB and have they not paid any of the loans lately?

Narendra: We have an exposure of Rs 1500 to TNEB; they have been paying very well. We also have their collection account and all the collections are coming to us. State government is taking some steps to improve the financial position and also have good power supply to the industry.

Q: You marked strong growth of around 25% in the previous quarter on a year-on-year basis. What are you factoring in for FY12 and in which sectors could we see the maximum growth or traction coming from? On which sectors do you maintain a cautious view?

Bakshi: We are looking at a much more moderate growth this year, in line with the RBI guidelines. Our budget for the year is not more than 20-22%, which we hope will materialise during this year including all the sectors. As far as the credit flow is concerned, there are a few factors to consider. Flow of the credit depends on sectoral performance and demand. It also depends on where we are reaching prudential caps, which we have internally fixed on various sectors.

For example, we have been regularly cautious on power or commercial real estate. We have substantial sanctions in hand, which are in the process of disbursement. The sector also needs some sort of stabilisation but micro level power projects can still be considered despite that. I don’t think we are cautious on any other sectors besides that.

Q: What is your own exposure to some of those microfinance institutes (MFIs) for which a corporate debt restructuring was in the process. Do you have any exposure to the big MFIs in Andhra Pradesh?

Bakshi: I will not talk about specific MFIs, but our total exposure to MFIs is about Rs 100 crore.

Q: Any MFI exposure? What is the status of the corporate debt restructuring (CDR), do you think it will go through?

Narendra: We have Rs 460-490 crore and got four accounts restructured since there has been a provision for restructuring. We have faced no difficulty on the payment front, it has been up-to-date. We are now continuously financing the MFIs. There are many good players in that space. We do take a note of the fact that there is a role play for MFIs and we should consider some of them for our advances as well.

Q: What might be the increase in the gross NPLs if there is slippage in your numbers this year?

Narendra: There are some NPAs, which were restructured earlier, still have liquidity problems. Similarly, there are certain accounts, which have issues because of linkages. We can restructure them if more problems occur.

Q: Can you give me a number on that?

Narendra: As far as our NPAs are concerned, we have a system related problem, which we are trying to resolve. In fact, we are also getting a good recovery from system related accounts. If the overall NPA aggregate matches with the Rs 2100 crore level of last year, then the recovery performance also remains very robust.

In fact, we would have recovered already more than Rs 400 crore and Rs 451 crore of NPAs as on June. So, we expect the level of incremental NPA to remain same on a quarterly basis. By the end of the year, we would be able to have fairly good amount of recovery. Our plan is to hold on at the current level of the gross NPA.

Q: If you can give us a percentage estimate of that increase?

Bakshi: I gave you a percentage of 1-1.2%.

Q: Any percentage for gross NPLs?

Bakshi: This will be the gross accretion minus upgradations and recoveries will be the net addition.