|Watch those NPAs|
|Thursday, 16 February 2012 00:00|
RBI deputy governor Anand Sinha’s assessment of the NPAs of banks should be heeded. Sinha said that “the situation is under control but there is an underlying reality that is not very comfortable”. He pointed out that gross NPAs are rising, clearly the result of some reckless lending before the slowdown hit the economy. With economic growth looking up only slightly, smaller corporates are understandably unable to service their loans as reflected in the ratio of recoveries to NPAs, which has dropped to less than 29% in 2010 from around 41% in 2008. Apart from sectors like textiles, aviation, construction and power, the other big stress area is agriculture. While some bank managements have indicated that a good rabi harvest should ease the pressure, and that recoveries are picking up, one bad monsoon can undo all their efforts. Indeed, with a couple of large airlines in big trouble as also companies like GTL, NPAs continue to rise and sharply in some instances, like at PNB, where they were up 42% y-o-y in the three months to December.
What is equally disturbing is the increase in restructured assets. At SBI, for instance, these stood at over R8,000 crore in the December 2011 quarter, an amount similar to that in the September 2011 quarter. Restructured assets at Bank of Baroda were up 27% sequentially in the three months to December 2011 and now account for 3.8% of the loan book. Union Bank now has R8,643 crore of restructured assets, which translates into 5.5% of assets. So while the NPA figure might not appear so large—gross NPLs for the system at the end of March 2011 were 2.6%—the portfolio of restructured loans needs to be watched because there have been slippages here too. For instance, the restructuring of SEB loans has just begun; unless there are dramatic reforms in the next few months, many of these loans will no longer remain standard assets. Indeed, in some sense,it would appear that there are potentially bad loans that are being camouflaged. The total quantum of restructured loans in 2010-11 is estimated at around R66,000 crore; the number could be far higher this year. Of course, some of this may relate to accounts where projects have been held up due to last-mile approvals not coming through. The deteriorating asset quality is showing up in the lacklustre profit numbers; at PNB, charges for bad debts rose 20% y-o-y and 46% sequentially, hurting the bottom line. Going forward, if more loans turn bad, provisions will only go up; right now banks provide 2% for restructured loans. That means the growth in profits, at least for some banks, will remain subdued for a while because even if the economy is recovering, it could take another six months or so before the weaker lot of companies is back on track.