Slowdown, defaults lead to NPAs almost doubling from 2009 level

Mahua Venkatesh , Hindustan Times  New Delhi, January 09, 2014

India’s banks, which stood tall during the 2008-09 crisis when global banking giants doddered following the collapse of Wall Street investment bank Lehmann Brothers, seem to have hit a rough patch with non-performing assets (NPAs) — loans that do not fetch any return — swelling to an alarming level, causing discomfort to both the finance ministry and the Reserve Bank of India.

While the government has asked banks to clean up their books by focussing on recovery and go after wilful defaulters, bankers said it might take a while to reach a comfort zone in NPAs. But officials are optimistic.

“We are monitoring the situation. Recoveries have been good and things will get better from now on. The worst is over and there is no need to press the alarm button,” Rajiv Takru, secretary, financial services, told HT.

However, Takru said that a one-size-fits-all formula will not work for banks. “Each bank has to focus on how to address the situation in an independent manner and something that works for a big bank may not work for a mid-sized bank,” said Takru.

With the sharp slowdown in the economy, several companies and even retail borrowers have defaulted in their repayments. While some have failed to repay due to genuine reasons — such as dwindling profits in a slowdown — many are said to have willfully defaulted, taking advantage of the adverse situation.

As a result, bad debt levels  in Indian banks have almost doubled since 2009 to 4.2% of total loans outstanding at the end of last September, according to the Reserve Bank of India (RBI), which also highlighted that corporate debt restructuring (CDR) has increased significantly. Gross NPAs for 40 listed banks stood at Rs. 2,29,007 crore as on September 30, 2013, which is 27% higher than Rs. 1,79,891 crore as on March 31, 2013, said a study by industry chamber Assocham. The study suggests that NPAs may rise further in 2014. 

Private sector banks, however, are relatively better placed than their government-owned counterparts in terms of NPAs primarily because their lending portfolios are more diversified. Public sector banks are mandated to lend to small and medium enterprises and farmers, considered riskier.

“With high inflation and continuing slowdown in the economy leading to job losses, it is unlikely that things will improve anytime soon,” said Nirupama Soundararajan, additional director and team leader, financial sector at industry chamber Ficci.

In a bid to address the situation, banks have been asked to deny additional loans to promoters of companies that have defaulted on repayment of loans. In effect, this means if a company has defaulted in repayment of loans, the promoter cannot seek loans for other companies controlled by the same group. Besides, promoters of companies seeking CDR are likely to be asked for a list of personal assets and these will be charged to lending banks to ensure that banks have sufficient collateral to cover their loans in case of defaults.

“We are taking all steps to ensure that recovery increases and there is no further slippage. We are also going through all records, books and transactions of borrowers that have failed to repay to assess if they are wilful defaulters,” said M Narendra, chairman and MD, Indian Overseas Bank.

Finance minister P Chidambaram had earlier said that defaults in repayment of loans was primarily due to the defaulting by big borrowers.