Bad loans to cross Rs 1 lakh-cr mark

Mumbai: Bad loans, or non-performing assets (NPAs) of banks are set to cross the Rs one-lakh crore mark in the current fiscal as the weakened asset quality of the banking sector is likely to spill over to the year 2011-12. After the 25 per cent rise in gross NPAs of bank to Rs 77,048 crore in 2009-10, bad loans of banks shot up by another 20.97 per cent in 2010-11, impacting the earnings of many banks and showing an overall rise of 77.75 per cent in the last three years.

Of this, State Bank of India alone accounts for over one-fourth of the NPAs as the largest bank reported bad debts of Rs 25,326 crore in 2010-11.

“The current fiscal will be slightly better for banks as most banks including SBI had made higher provisioning to clean up their balance sheets. The impact of this measure will be witnessed in the coming quarters. If they tighten up the recovery process, whatever they had provided will add to the profits,” said the former chief of a nationalised bank.

Among other banks, Punjab National Bank NPAs rose from Rs 3,214 crore to Rs 4,379 crore and Bank of Baroda from Rs 2,400 crore to Rs 3,152 crore. Among private sector banks, HDFC Bank managed to bring down its NPAs from Rs 1,816 crore to Rs 1,694 crore, ICICI Bank reported a marginal rise in bad debts from Rs 9,480 crore to Rs 10,034 crore in 2010-11.

“The earnings growth in the Indian banking sector in Q4 of FY11 grew by only 8 per cent y-o-y. This is attributable to the dismal performance by SBI, whose net profits for Q4 declined by 99 per cent to Rs 20.9 crore for the period. The reason for this decline in performance by SBI is being ascribed to decline in the Net interest margins; deterioration in the asset quality (and the consequent rise in NPAs); and the rise in the pension provisions for the employees,” said a note by Kotak Mutual Fund.

Excluding SBI, the earnings in the banking sector saw a growth of 31 per cent (year-on-year). The loan growth continues to expand at around 22.5 per cent (YOY). However, due to slower expansion in deposit growth despite high interest rates, the net interest margins (NIMs) are expected to come under further pressure in future. Moreover, the rising interest rates may hit the treasury income and may also continue to dampen the asset quality.

Many analysts and bankers feel that banks with buoyant credit growth and high CASA (current and savings account balances) may be able to address their asset quality and NIM concerns more efficiently.

“The RBI has initiated a slew of policy measures including aggressive rate hikes to rein in Inflation. The banking sector has responded by raising base rates with SBI raising its base rate by 75 bps. With every such hike in interest rates, we are reaching the tipping point beyond which demand could suffer. Thus volumes, margins and asset quality of the sector will come under increasing stress,” said a study by Enam Research.

The RBI stepped in to take preventive measures even before Finance Minister Pranab Mukherjee expressed his concern over the weakening asset quality on May 22. “Advances classified as “sub-standard” will attract a provision of 15 per cent as against the existing 10 per cent.

The “unsecured exposures” classified as sub-standard assets will attract an additional provision of 10 per cent, i.e., a total of 25 per cent as against the existing 20 per cent,” RBI said in a circular on May 18.

Source: Financial Express