NPAs are a concern, but no reason to panic: IDBI chief

• Image Credit: Courtesy: IDBI
• M.S. Raghavan

 10 Mar 14

Dubai: India’s banking sector is facing a challenging environment as slowing economic growth has exacerbated the increase in non-performing assets (NPA), but there is no reason to panic as most banks have the capability to augment capital buffers, M.S. Raghavan, chairman and managing director of IDBI Bank toldGulf News.

IDBI Bank, formerly Industrial Development Bank of India (IDBI) was a development financial institution that was converted into a public sector commercial bank in 1994. Raghavan attributes the rising NPAs to cyclical and structural factors.

“Non performing loans (NPLs) are closely linked to the growth cycle. From 1992 India was growing consistently at 6 per cent on an average and went up all the way to peak at 9 per cent. Commensurate with that the NPLs were shrank to as low as 2 per cent. In the past three and half years we have seen that not only the growth has topped out, but has started declining and with the decline in growth the NPLAs too have started rising,” said Raghavan.

A slowdown in economic growth combined with excess capacity in the economy adversely impacted the NPL situation. IDBI Bank’s third quarter net profit dropped 75 per cent to Rs1billion compared to same quarter last year, dented by a steep fall in non-interest income and slow growth in net interest income. Asset quality of the bank worsened during the quarter. Gross non-performing assets (NPA) increased 177 basis points to 5.44 per cent and net NPA climbed 100 bps (11 bps quarter-on-quarter) to 2.93 per cent compared to a year ago.

Apart from the slowing economy, Raghavan attributes historical a structural reasons for the current NPL situation of the bank.

“We were a development financial institution that was converted into commercial bank. Historically balance sheet was largely exposed to corporate and infrastructure sectors. Even today 76 per cent of our portfolio is committed to corporate sector and about 24 per cent to retail sector,” he said.

Capital infusion

As a result of rising NPLs and lower profitability, provision expenses of most banks rose in the first three quarters of the year. Additionally the introduction of Basel III raises the amount of capital that Indian banks will need to meet minimum targets.

With its tier-I capital adequacy ratio below eight per cent, IDBI Bank plans to achieve it above eight per cent by the end of March. In an effort to augment capital, IDBI has been in talks to sell some of its strategic stakes it owns in other companies.

“By the March 31 this year, our tier 1 common equity will be 7.1 per cent. We will like to have our common equity at 8 per cent or above. There is no compulsion on us to do it immediately. As per the Reserve Bank of India requirement we need to achieve it only by 2018. But as an acceptable practice in India we feel that our common equity has to be approximately 8 per cent,”

The bank recently made an attempt to sell its 17 per cent stake in credit rating agency Credit Analysis and Research Ltd (CARE), but the deal fell through, as the price was below its expectations of Rs900 (Dh53.97) a share. The bank is now attempting to sell a part or full stake in Stock Holding Corporation of India Ltd (SHCIL) in which it owns 18.9 per cent equity in SHCIL. In addition to sale of these strategic stakes, the bank is also understood to be seeking to raise $300 million (Dh1,102 million) through a Basel III compliant bond issue.