RBI raises concerns about bank loans, debt recovery

The report also expressed concern about a steep rise in the growth of restructured debt under the corporate debt restructuring or CDR mechanism in 2012-13. Photo: Bloomberg

  Mint Anup Roy 21 Nov 2013

Asset quality showed signs of deepening deterioration as doubtful loan assets rose in the sector, the central bank said

Mumbai: Indian banks are struggling to reduce bad loans and improve their loan recovery process, the Reserve Bank of India (RBI) said on Thursday, warning that increasing stress on asset quality posed a major challenge to the banking system.

RBI’s annual publication, Trend and Progress of Banking in India, released on Thursday, said the gross non-performing asset (NPA) ratio of the banking industry, at the aggregate level, stood at 3.6% at the end of March from 3.1% a year ago.

The deterioration in asset quality was most perceptible for State Bank of India (SBI), the country’s largest lender, and its five associate banks. The group’s NPA ratio reached 5% at the end of March. SBI and its five associates constituted 23.45% of Indian banking industry’s total assets in fiscal 2012-13.

“In the short term, the stress on banks’ asset quality remains a major challenge,” the report said.

Slower economic growth, which at 5% in the year to last March was the least in a decade, high interest rates and stalled projects have hurt the cash flows of companies and impaired their ability to repay debt. Prospects of a recovery in economic growth have been dimming, with estimates for the current year being progressively scaled down.

Asset quality showed signs of deterioration as doubtful loan assets rose in the sector, RBI said. A loan not serviced by the borrower for a year is termed doubtful.

The increased shift of loan assets towards the doubtful category was most prominent at the SBI group and nationalized banks, the report said, adding that the slippage ratio, defined as additions to NPAs during the year as a percentage of standard advances at the beginning of the year, also showed an increase during 2012-13.

At the aggregate level, the ratio of restructured standard advances to gross advances stood at 5.8% at end-March 2013. It was the highest for nationalized banks—at 8.3%, followed by the SBI group—at 4.7%, according to the report.

“While the primary driver of the deteriorating asset quality was the domestic economic slowdown, the contribution of other factors like delays in obtaining statutory and other approvals as well as lax credit appraisal/monitoring by banks was also significant,” the report said, adding credit concentration in certain sectors and higher leverage among corporations also increased stress on asset quality.

The report also expressed concern about a steep rise in the growth of restructured debt under the corporate debt restructuring (CDR) mechanism in 2012-13. The mechanism covers only multiple banking accounts where the collective exposure is Rs.10 crore and above.

In 2012-13, the total number of cases approved for restructuring under this mechanism increased by about 37%. The debt thus restructured rose 52%. Iron and steel and the infrastructure sectors witnessed the maximum stress in asset quality.

Banks need to strengthen their recovery processes, and it should be focused on “efficiency and fairness—preserving the value of underlying assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly”, the RBI report said.

To do this, there is “urgent need for accelerating the working of debt recovery tribunals and asset reconstruction companies”.

If economic growth picks up, the bad debt position “may improve”, the report said.

Economists say that may not be the case in at least this financial year.

“The cyclical factors, like agriculture-related activities, may improve, but we have deep-rooted structural problems. Even as those are addressed, the positive impact will come only after a lag of seven-eight months. The reforms processes initiated were mostly by the end of the last fiscal and there’s still lots to be done. Overall, the last fiscal year was one of the most uneventful business years,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The root cause of all ills, though, remains inflation, Nitsure said. Until that is brought down substantially, India will continue to lose its competitive edge and a recovery in exports will be hard to achieve.

The year 2012-13 was marked by a slowdown in the growth of credit to all productive sectors—agriculture, industry and services. The slowdown was the sharpest for agriculture and allied activities, according to the RBI publication.

Retail loans, led by loans to the housing and auto sectors, was the only segment that continued to grow in the year.

However, Indian banks did well in garnering deposits. Private sector banks outpaced other banks in garnering savings bank deposits after the deregulation of the savings bank rate. Private banks offered higher interest rates—as much as 7%—for savings accounts, compared with 4% by public sector banks.

The share of savings deposits for new private sector banks stood at around 25% of their total deposit base and was the highest among all bank groups in 2013, the report said.

According to the report, Indian banks are relying more on short-term resources to fund long-term projects, leading to an asset-liability mismatch. While in the shortest maturity basket of up to one year, banks’ deposits outpaced loans, for longer term maturity baskets, loans outpaced deposits.

Going forward, public sector banks will require an additional capital of Rs.4.15 trillion, of which equity capital will be Rs.1.4-1.5 trillion, and debt capital will beRs.2.65-2.75 trillion.

The government, which has already infused Rs.47,700 crore in the banks and announced it would inject an additional Rs.14,000 crore, has enough headroom to liquidate its stakes in state-owned banks to raise more capital.

The government’s shareholding in its banks ranges from 55% to 82%.