The chief executive officer of a foreign bank, reacting to last week\u2019s Banker\u2019s Trust column on rising bad assets in Indian banking, has said things can get worse and at least six large banks will find themselves in a tight spot.<\/p>\n
I don\u2019t want to name the banks, but one thing for sure is that the Indian central bank is worried about rising bad assets of banks. It is particularly concerned about five pockets of Indian industries where banks\u2019 exposure can turn bad. The stressed pockets are telecom, textiles, power, aviation and the overall infrastructure space. The Reserve Bank of India (RBI) has asked all banks to furnish data on their exposures to these sectors.
\nBanks\u2019 loans outstanding in infrastructure, which includes roads, ports, telecom and power, among others, in December was Rs 5.97 trillion, about 20.5% higher than a year ago. Their exposure to telecom, over the past year, declined by about 4% to Rs 90,970 crore in December. Loans to the power sector, in contrast, continue to rise. In the past one year, such loans have risen by almost one-fourth to Rs 3.2 trillion.
\nSimilarly, loans to the textiles industry have risen by 12.5% to Rs 1.52 trillion. Banks\u2019 exposure to aviation, for which no data is readily available, could be at least Rs 70,000 crore.
\nOverall, about Rs 8.2 trillion worth of loans are locked in these sectors, roughly about 20% of the banking industry\u2019s total loan book. If indeed stress intensifies in these sectors, banks\u2019 non-performing assets (NPAs) are bound to go up. This will affect profitability as banks do not earn any interest on bad loans and, on top of that, they need to set aside money for such loans.
\nOne can argue things will look better as RBI has already indicated the interest rate cycle will turn. After a series of 13 rate hikes between March 2010 and October that made money more expensive, RBI pressed the pause button in December and cut banks\u2019 cash reserve ratio (CRR), or the portion of deposits that commercial banks need to keep with the central bank, in January. There could be another round of CRR cut in March and, in all likelihood, we may see a rate cut in April.
\nWhen the cost of money comes down, corporations will be in a better position to pay back bank loans. This is theoretically correct, but an oversimplification of the current scenario.
\nIf indeed the cost of money and a slowing economy are the reasons behind the rise in bad debts, then all banks should have been affected. But that\u2019s not the case. In the December quarter, quite a few banks have actually managed to bring down their bad assets. For instance, ICICI Bank Ltd\u2019s net NPAs as a percentage of loans dropped to 0.83% from 0.93%. Similarly, Bank of India\u2019s net NPAs dropped from 1.98% to 1.78%, and that of Union Bank of India, from 2.04% to 1.88%. Andhra Bank, Syndicate Bank, UCO Bank, United Bank of India, and a couple of State Bank of India (SBI) associates have shown a drop in net NPAs in December from September. SBI is yet to announce its earnings for the December quarter.
\nNet NPAs as a percentage of loans may not be a good yardstick to judge a bank\u2019s health as it can always make hefty provisions to bring it down. But even the gross NPAs of individual banks show a divergent trend. For instance, gross NPAs as a percentage of loans have declined for ICICI Bank, Kotak Mahindra Bank Ltd, Bank of India, Union Bank, Andhra Bank, Syndicate Bank, UCO Bank, United Bank of India and two SBI associates, but has risen for many, including Punjab National Bank, Bank of Baroda, Canara Bank, IDBI Bank Ltd, Allahabad Bank, Corporation Bank and a few others.
\nIndeed, NPAs\u2014whether gross or net\u2014as a percentage of loans cannot be a foolproof tool for a reality check as by simple arithmetic the proportion of bad assets shrinks when a bank\u2019s loan book grows faster, but what baffles me is the uneven trend against a uniform economic background.
\nThere can be two explanations for this. One, men are being separated from the boys, and, two, the figures that we are seeing are not authentic. I am not making any insinuations, but once the banks submit data on their exposures to stressed sectors, the regulator will get a clearer picture on how critical the problem of bad assets is.
\nSome banks are looking for an easy way out to tackle the problem\u2014loan restructuring\u2014but this can only delay the inevitable. In 2009, after an unprecedented global credit crunch, RBI had asked banks to recast loans across sectors where borrowers were under stress. Roughly about 5% of loans were restructured at that time.
\nMany of the restructured loans have started turning bad. That\u2019s not good news. But what is more worrying is that banks have been looking for restructuring loans given to troubled sectors and firms and asking for special dispensation from the regulator so that they do not need to set aside money for such restructured loans, which otherwise would have turned bad.
\nIn May, RBI tightened the provisioning requirements on certain categories of NPAs and restructured loans, but that\u2019s not enough. Indeed, restructuring of any loan should be left to the banks\u2019 commercial judgement and if they find that a moratorium on loan repayment or a cut in interest rate could help a borrower repay their money they should be allowed to do so, but banks must set aside money even for such restructured loans till they turn good. Otherwise, restructuring of loans will simply be a mechanism to bring down NPAs.<\/p>\n","protected":false},"excerpt":{"rendered":"
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