Bad assets will pile up, but overall situation is under control: bankers

Anup Roy :Livemint:29 Feb 2012


Airlines, textiles, iron and steel are some of the sectors that are showing strains and firms are finding it difficult to repay bank loans


Mumbai: Top bankers told India’s central bank on Wednesday that in the current economic environment they could end up piling up more bad debts but overall the situation will remain under control. Banks said bad assets may grow by Rs. 60,000-65,000 crore—about 1%.


Airlines, textiles, iron and steel are some of the sectors that are showing strains and firms are finding it difficult to repay bank loans. When they are not able to pay back for three months, banks are required to treat the accounts as sub-standard and set aside money for the same.

Rising bad assets impact banks’ profitability as they do not earn interest on such assets, and on top of that, they need to set aside money.

Bankers discussed the issue at a meeting convened by the Reserve Bank of India (RBI) at its headquarters in Mumbai.

RBI, on its part, asked the bankers to step up their recovery process and tighten their asset quality monitoring mechanism. The central bank also took stock of Indian banks’ preparedness to embrace the Basel II norms, global rules that will assess bad assets in a different way.

Banking industry’s bad debts as a percentage of total lending are now at a six-year high.

Chiefs of State Bank of India, ICICI Bank Ltd, Punjab National Bank, Bank of Baroda, and Bank of India, among others, discussed relevant issues with RBI deputy governors K.C. Chakrabarty and Anand Sinha.

The meeting did not discuss in detail restructuring of loans as an RBI-appointed committee is looking into this, a banker who attended the meeting said.

“We did an assessment of NPAs (non-performing assets). Generally, there was a feeling that we should not be complacent but it (NPA) is not something which is too scary. We said NPA and restructure definition should have a time line. If an account performs after restructuring it is not affected for life... So that account should be taken out of the categorization of restructuring,” State Bank of India chairman Pratip Chaudhuri told reporters after the meeting.

“RBI was by and large confident that we should be able to reasonably bring down NPAs in the system even as higher incremental slippages can be expected,” said another banker present at the meeting, who declined being named.

Banks have seen an increase in bad loans as economic growth slows to 7% this fiscal from 8.4% last year. After declining continuously between fiscal years 1995-96 and 2007-08, the total stock of bad loans at banks has risen sharply, RBI’s Sinha said this month.

Tuesday’s discussion focused on four key points. Apart from getting bankers’ view on bad debts, RBI sought to know banks’ preparedness for advanced approach under Basel II norms. Banks are to apply to RBI by June or September stating their readiness to move on to the new system of monitoring loans and mitigate risks of bad debts.

RBI also asked banks to improve their MIS (management information system) capabilities and build up their data warehousing capabilities so that the returns filed by banks, or regular bank activity-related statistics, are completely system driven.

One critical element discussed at the meeting was that all accounts should have a single unique identification number instead of multiple identifications for different types of loans.

RBI’s latest data shows that bank credit growth has fallen to 15.7% against 24% a year ago as on 10 February.

Segregated data released on Wednesday showed that credit to industry increased by 20.2% in January 2012 compared with 26.5% in the previous year

anup.r@livemint.com