Source : Vandana : The Week :Saturday, December 3, 2011 14:22 hrs IST
Debt recovery officers of public sector banks are a worried lot these days.
Reason: the escalating number of loan defaulters. The banking sector, which is already under pressure from frequent rate hikes, now has another problem to tackle—the non-performing assets. Public sector banks particularly are facing a hard time containing them, as a part of their NPAs is on account of non-payment by government-owned entities.
Banks' asset quality has become a major concern for the RBI and it has asked lenders to monitor and tighten their credit management systems. “Rising interest rates and substantial amount of restructuring done during the crisis period, if not done with due care, are likely to put further pressure on asset quality of banks,” said a recent RBI report.
The results for the quarter ended in September of most public sector banks were below expectations owing to the mounting NPAs. Higher NPAs require banks to do higher provisioning (which means setting aside capital for loans that have gone bad), locking up a significant amount of capital and eroding profitability. Under the current provisioning norms, banks have to maintain funds ranging from 10 per cent for substandard assets to 100 per cent for assets under ‘loss category'.
“Banks also need to maintain the provision coverage ratio of 70 per cent of gross NPAs. Provisions eat into your capital generation. It is going to be a tightrope walk for banks to manage the NPAs,” said Vaibhav Aggarwal, research analyst, Angel Broking. India's largest lender State Bank of India's provisioning of bad loans stood at Rs:4,664 crore at the end of September, an increase of 21 per cent over the corresponding period a year ago.
The economic downturn in the west is one of the major reasons for the increase in non-performing loans. Profit margins of many businesses have shrunk, leading them to default on loans. “There are clear signs of slowdown in the Indian economy as well. Exports grew by only 10.8 per cent, the lowest in the last two years. Indirect tax collections have dropped by 2.5 per cent and the index of industrial production (IIP) has dipped by 1.9 per cent. The business climate has become gloomy and even though there is no intention to default, companies are unable to pay up on time,” said Robin Roy, associate director (financial services), PricewaterhouseCoopers.
The frequent increase in interest rates is another problem. Many companies that announced the second quarter results recently have identified the increasing interest cost as one of the major reasons for their profitability going down. The RBI hiked key rates 13 times in the last 20 months.
International rating agency Moody's has raised red flag on public sector banks' spiralling NPAs, and changed its outlook on the banking sector from “stable” to “negative”. “With asset quality, given the tightening environment, we anticipate that it will deteriorate over the next 12-18 months, thereby causing an increase in provisioning needs for the banks in FY2012 and FY2013,” said Vineet Gupta, vice-president and senior analyst at Moody's.
Interestingly, the computer-based recognition of NPAs, to which all banks had to shift by September 30, has added to the banks' woes. Computer-based NPA recognition removes the subjectivity that the banker may exercise in classifying a loan as non-performing. “The system recognition has given a number of new NPAs. But, our recovery teams are very active. We have started debt resolution branches and centres to support them. Retail borrowers are still turning up to pay as they are in a better shape but the problem is with corporates and small and medium enterprises,” said an SBI official.
Also, a large number of loans that were restructured in 2007-08 have come to haunt public sector banks. Some of these loans have now become NPAs. There are various ways of restructuring a loan, such as allowing customers to postpone their interest payments until business prospects improve, increasing the tenure of the loan or, in case of corporates, converting debt into equity. If a company goes for a second round of restructuring, it is calculated as NPA on the bank's books. Restructured loans that turned bad accounted for 17 per cent of loans of 10 major banks.
A part of the stress on public sector banks' balance sheet is due to the exposure to sick government-owned entities, such as Air India and state electricity boards (SEBs). The national carrier has a debt of Rs:46,950 crore in a consortium of 20 banks. Its annual interest payment on this debt is around Rs:1,800 crore. Air India, which has accumulated losses of Rs:20,000 crore, has been in a poor shape for quite a while, raising question marks on receivables to the banks.
The whole aviation sector, in fact, could dent the asset quality of banks, say experts. “All the aviation companies are bleeding and we have seen the Kingfisher fiasco recently. The government will have to take some serious steps to save the airlines and banks that have lent to them,” said Roy.
Some other sectors are also under stress. “Textile, infrastructure and power are the sectors where one could see some stress. But, we have not stopped fresh loans. We have to support the industry and are disbursing loans on a case-to-case basis,” said S.K. Verma, general manager, Union Bank of India.
In October, rating agency Crisil cautioned that lenders would be risking about Rs:56,000 crore unless the government brought about urgent reforms in the power sector. SEBs are staring at huge losses as a result of selling power at subsidised rates and mounting transmission and distribution losses. Though the loans to SEBs have not yet become NPAs, analysts are concerned about them.
“We don't expect government entities to be stressed assets on our books. Some of them could go for restructuring,” said M. Sridhara, deputy general manager, Canara Bank. Punjab National Bank has already restructured its loan of Tamil Nadu State Electricity Board.
According to the RBI, the agricultural sector contributed 44 per cent of the total incremental NPAs of domestic banks in 2010-11. Another major contributor is the SME sector. SMEs have been severely affected by the downturn and most of them are under financial distress.
CPI(M) leader Gurudas Dasgupta, who had come out with a report cautioning the government on spiralling NPAs in 2005, has a different take on the issue. “There is a lack of political will on the part of the government to move on this issue,” he said. “There should be more aggressive recovery of corporate loans by banks as these loans constitute a major portion of the NPAs of banks. There should be enough security to cover the loan. Banks should be more prudent while lending to corporates.”
In contrast, private banks have been able to reduce their net NPAs. They reduced their accumulated net NPAs from Rs:6,972 crore in 2008-09 to Rs:3,871 crore in 2010-11. Said Aggarwal, “Private sector banks have been in a consolidation mode and are lending more wisely. Private banks can change their business mix more quickly, plus their productivity and efficiency are better.”
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