Bankers Got a BIG Blow by SC verdict on coal blocks

The fears of increased asset quality stress come at a time when the banking system is already grappling with a pile-up of bad loans as a consequence of the slowdown in the economy. Photo: Reuters

Mint 25 Sep 14

Mumbai: Banking stocks fell on Thursday on fears that loans given to several power and steel firms could turn sticky after the Supreme Court cancelled the allocation of 214 coal blocks on Wednesday.

Shares of Allahabad Bank fell 12.20% on the National Stock Exchange (NSE), Union Bank of India 6.94%, IDBI Bank Ltd 11.19%, Oriental Bank of Commerce 7.60%, Punjab National Bank 5.89%, Andhra Bank 11.83%,Syndicate Bank Ltd 7.89%, Bank of India 7.28%, Canara Bank Ltd 4.07%,Bank of Baroda 1.5%, Axis Bank Ltd 4.18%, State Bank of India (SBI) 3.95% and ICICI Bank Ltd 2.63%.

NSE’s CNX PSU Bank Index fell 5.09%, while the Bank Nifty Index fell 2.8%.

According to analyst estimates, the top banks, on average, have extended 13% of their loans to mining, coal, iron and steel and infrastructure companies.

 SBI, India’s largest lender, has lent 13.7% of its total loans to the above mentioned sectors, ICICI Bank 16%, 

Punjab National Bank 15.7%,

 Bank of Baroda 7.4%,

 Union Bank of India 14.5%, 

Bank of India 10.4%, 

Axis Bank 11.5% and

 HDFC Bank Ltd about 8%.

According to a report by Karvy Stock Broking Ltd on Thursday, the banking sector has an exposure of Rs.5.01 trillion to the power sector alone, and the exposure has grown from 4.3% of non-food credit in March 2008 to 8.83% in June 2014. Banks had financed many new power projects in the period, which may be negatively impacted by the court verdict.

The brokerage said that cancellation of allotted coal blocks to these projects will adversely impact the chances of recovering these loans. Banks which lent to these power producers will also find many more accounts turning bad.

According to Karvy analyst Asutosh Kumar Mishra, if these projects fail to take off, banks will have to either write off or classify them as non-performing assets (NPAs), adding that as the court has asked the government to re-auction these coal blocks, it would mean substantial delays in projects and result into slippages and restructuring of loans to these projects.

“Hence, we expect part of this exposure to turn into NPAs over the next 18 months as many of these projects will become unviable,” Mishra said in the note, reiterating the brokerage’s stance in the 26 August note.

“...It is difficult to calculate the exact impact on each bank as banks do not provide project-wise lending details. However, as a thumb rule, bank with higher power exposure should have a relatively higher impact,” he added.

Fears of increased asset quality stress come at a time when the banking system is already grappling with a pile-up of bad loans as a consequence of the slowdown in the economy.

The gross NPAs of 40 listed banks in the June quarter stood at Rs.2.52 trillion from Rs.2.08 trillion in the year earlier. 

While gross NPAs in the system are at 4% of total loans,

 total stressed assets (including restructured assets) are estimated at close to 10%

 by the Reserve Bank of India (RBI).