Asset quality of banks a serious cause for concern

For public sector banks, the situation appears to have taken a particularly dire turn since the quarter ended June 2011. The author is Director, Crisil Research, a division of Crisil.

The current economic downturn is proving to be a testing time for banks, with asset quality concerns coming sharply to the fore yet again. The gross non-performing assets (GNPAs) of banks was 2.9 per cent as at the end of March 2012. Critically restructured assets and NPAs, which have surged sharply in the past year and a half, will rise further in 2012-13 and aggravate asset quality concerns in the banking system.

The worries over asset quality are more so in the case of public sector banks (PSBs) which account for around 80 per cent of the banking credit. The difference between PSBs and private banks is starkly evident when one looks at absolute numbers.

During 2011-12, GNPAs of PSBs grew by Rs.39,000 crore compared to only Rs.500 crore in the case of private banks. For private banks, this enormous difference is a reflection of better credit underwriting norms, recoveries and upgradations.

In addition to the worsening macro-economic scenario, factors that drove this marked deterioration in asset quality of PSBs during 2011-12 include sharp upward movement in interest rates, volatile currency and commodity markets, and the adoption of a system-based NPA recognition that caused a sudden spike in GNPAs from the small retail and agri-based portfolio. The major sectors that fuelled this rising trend in NPAs are real estate, textile, aviation and infrastructure (specifically, power and telecom segments), in addition to priority sector loans.

For PSBs, the situation appears to have taken a particularly dire turn since the June 2011 quarter. As the accompanying chart shows, restructured assets, as a percentage of advances, were over 7 per cent at the end of the June 2012 quarter compared with 4.8 per cent as of June 2011.

More importantly, what stands out in loan restructuring this time when compared with 2008-09 and 2009-10 is that it is not just small borrowers who are facing problems with loan repayments, but large corporates as well. In the present phase, over two-thirds of the loans restructured (until December 2011) had a ticket size of over Rs.1,000 crore.

This qualitative change is also indicated by a fairly sharp increase in the number of corporate debt restructuring (CDR) cases.

From 59 in the 12 months ended June 2011, the number of cases referred to CDR increased to 110 in 12 months ended June 2012, and the corresponding amount of loan referred has shot up to Rs.83,800 crore from Rs.24,600 crore.

Infrastructure, telecom, ship-breaking, iron and steel and construction account for around 70 per cent of the loans referred to CDR during the 12 months ended June 2012.

The large quantum of restructuring is also a reflection of the prevailing stress on corporate India’s credit quality because of lower profitability, weak demand and tight liquidity.

Asset quality will deteriorate further if restructured accounts slip into the GNPA category. And indications are that this is already happening. As of March 2012, close to 14 per cent of restructured advances for 14 PSBs (together accounting for around 65 per cent of advances) were classified as GNPA, up from around 11 per cent as of March 2011.

It is evident that both profitability and capital adequacy of PSBs will be severely hit if a significant proportion of the restructured assets turn out to be non-performing assets. With India’s GDP growth in 2012-13 expected to slip to 5.5 per cent from 6.9 per cent in 2011-12 and the global economic situation still seeming extremely fragile, the risk of slippages appears highly plausible.

Gross NPAs of the banking system as a percentage of advances are, therefore, likely to touch 3.5 per cent by March 2013.

At the moment, the comfortable capital position in the banking system acts as a buffer to these risks. In particular, credit risk profiles of many PSBs are underpinned by expectations of continued support from the Central Government.

Nevertheless, in the short run, closer monitoring of restructured accounts to prevent slippages and sale of some non-performing assets would help in conserving capital.

http://www.thehindu.com/business/Economy/article3758412.ece

Be vigilant on NPAs, Pranab tells PSBs

                                  
Banks asked to promote electronic mode of transactions

Finance Minister Pranab Mukherjee, on Tuesday, directed public sector banks (PSBs) to keep up the momentum of bringing down their non-performing assets (NPAs) and be vigilant in this regard to ensure sound financial health of the country's banking system.

Lauding the PSBs for reduction in gross NPAs from the level of 3.18 per cent in December, 2011, to 3.10 per cent in March this year, Mr. Mukherjee said: “I am happy that banks have taken up the challenge to reduce NPA's ...This momentum now has to be kept up and timely action in this direction would ensure sound financial health of the banking sector.”

Addressing chief executives of PSBs and financial institutions at a meeting for performance review of last fiscal, the Finance Minister expressed satisfaction over the banks ‘very proactively' responding to measures aimed at avoiding NPAs and pointed to recent decisions on restructuring of loans extended to textile units and distribution companies (discoms) in the power sector as good examples of NPA management. “I urge you to deploy various tools at your command for containing and rolling back NPAs in accordance with the guidelines of the Reserve Bank of India,” he said.

As a proactive step to help these sectors, which are under stress owing to the economic slowdown, bank loans totalling about Rs.1.30 lakh crore to discoms and Rs.35,000 crore to the textile units are in the process of being restructured so that these sectors can obtain fresh loans.

Reviewing the performance of the lending companies during the fiscal, Mr. Mukherjee drew satisfaction from the fact that while PSB deposits grew by 14.4 per cent to over Rs.50 lakh crore in 2011-12, advances also went up by 17.7 per cent to over Rs.40 lakh crore on a year-on-year basis. Alongside, the banks' net profits rose from Rs.44,900 crore to over Rs.49,500 crore during the year even in the wake of a difficult economic scenario. As for credit to the farm sector, the PSBs had been set a target of Rs.5.75 lakh crore for 2012-13, which is achievable as loans to the sector exceeded Rs.5 lakh crore during the previous fiscal year.

For the current fiscal, the Finance Minister has asked the PSBs to pay special attention to ensuring that every farmer household receives a Kisan Credit Card and existing accounts are quickly replaced by debit cards under the new scheme.

While asking the RRBs (regional rural banks) to undertake coordinated branch expansion with their sponsor banks and start rolling out of ATMs and issuance of credit cards, Mr. Mukherjee also told the PSB chiefs to promote electronic mode of transactions over other modes. “They should examine the possibility of making NEFT transactions up to Rs.1 lakh free of charges, as has been done by Oriental Bank of Commerce,” he said.

In this regard, he asked the Reserve Bank of India (RBI) to proactively work on this front and ensure that all electronic banking transactions are made possible without any charges being levied. “The use of debit cards to the point of sale without any transaction charges at least for micro and small transactions should be our next objective,” he said.