Mumbai: India’s banks have some reason to cheer: The economic slowdown hasn’t dented the quality of their assets. Not yet.
A Mint analysis of the October-December quarter earnings of 39 listed banks shows that most lenders managed to keep the level of non-performing assets, or NPAs, a measure of stressed assets, low.
In absolute terms, gross NPAs rose from Rs51,160.57 crore in the April-June quarter to Rs55,743.37 crore in the December quarter. As a percentage of total advances, however, gross NPAs actually declined because the loan base had grown. Gross NPAs include doubtful loans against which banks have set aside money to cover the risk of default.
Increasing risk? The Reserve Bank of India office in New Delhi. Analysts say RBI’s directive relaxing the process of identifying bad loans for banks will be used by lenders to keep their books clean. Harikrishna Katragadda / Mint
Banks have been keeping a hawk’s eye on the quality of loan assets amid the downturn that has forced companies to hold back investments and consumers to spend less. The economy is forecast by the central bank to slow to a growth rate of about 7% this fiscal from an average pace of 8.9% in the past four years.
Analysts warn that if the slowdown intensifies—as it is forecast to do in the next fiscal year—and corporate profitability declines, defaults may start piling up as borrowers’ ability to repay is squeezed further. Besides increased vigilance on loan quality, what has helped banks keep their level of NPAs low so far are new central bank norms on loan restructuring.
Banks can restructure their stressed assets until 30 June. While their loans to the real estate sector can be revamped once, all other loans can be restructured twice if the banks find that their borrowers are victims of the economic slowdown and are unable to service debt. To restructure such loans, banks need to have the comfort of their auditors.
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A large part of bank credit in India in the past few years has flowed to real estate, retail and small and medium enterprises, or SMEs—the sectors particularly vulnerable in any economic downturn.
In the normal course, at the first stage of an NPA, a loan becomes “substandard” if it is not serviced for 90 days. Banks are required to set aside 10% of such loans as provisions. After a year, a “substandard” loan becomes “doubtful” and banks need to set aside 20-50% of the amount to cover the risk. Finally, a loan becomes a “loss” when a bank is convinced that it cannot be recovered and for such assets, banks need to provide 100% of the loan amount.
Keeping books clean
Following the directive from the Reserve Bank of India (RBI), banks do not need to follow this process for borrowers who are deemed to have become victims of the economic downturn. According to analysts, most banks will use the “relaxation” to keep their books clean—at least until they have the leeway to do so.
“We believe these moves increase the underlying risks for Indian banks significantly,” said an 8 December note by investment bank Morgan Stanley India Co. Pvt. Ltd.
“The fact that RBI has given this leeway to banks until 30 June 2009 implies that RBI also believes that the moves are risky. The fact that it is still taking these steps implies that the underlying problem in these sectors is really bad, in our view,” said the note authored by analysts Anil Agarwal, Ashish Jain and Mansi Shah.
Morgan Stanley said the lower provisioning would “prop up near-term earnings progression—even though the underlying loan book has problems”.
Any rise in NPAs will not be reflected even in the fourth quarter results, said Jaiprakash Toshniwal, a banking analyst at ULJK Research Ltd, a Mumbai-based brokerage.
“But it will start biting in the first quarter (of the next fiscal year). And by the second quarter, the NPA situation will jump and banks (will) have to book higher NPAs,” he said.
Anand Dama, an analyst at domestic brokerage Centrum Broking Pvt. Ltd, said NPAs may start rising even earlier—in the next quarter—because the annual results will have to be audited and banks will have to convince auditors why they have restructured the existing loans.”
Bankers, however, strongly deny that they have taken advantage of the RBI restructuring norms to understate NPAs. They claim that their risk management procedures have been strengthened in the last few quarters, helping them keep NPAs low.
“Every bank is monitoring each and every account very carefully and is approaching clients at the end of the month if they fail to pay their dues. NPA management is perhaps the most critical aspect of banking,” said Asit Pal, executive director of Corporation Bank.
To be sure, a few banks have started showing increased NPAs, although they aren’t yet ringing any alarm bells. HDFCBank Ltd’s gross NPA ratio increased in the October-December quarter to 1.90% from 1.60% in July-September and 1.20% in the year-ago quarter.
Kotak Mahindra Bank Ltd’s gross NPAs rose to 4.08% of total loans from 3.16% sequentially. It was at 2.88% a year ago. Yes Bank Ltd’s third-quarter gross NPAs rose to 0.44% from 0.19% sequentially. India’s largest private sector lender ICICIBank Ltd’s gross NPAs rose from 3.72% in June quarter to 4.14% in the December quarter. Among public sector lenders, Indian Overseas Bankand Canara BankNPAs have increased.
Gross NPAs in the banking industry in fiscal 2010 will more than double to 4.7% of total loans from the current level of 2.3% and will peak at 5% in fiscal 2011, according to Ravi Sankar, an analyst at Mumbai-based Antique Stock Broking Ltd.
Analysts say banks with higher exposure to unsecured loans—loans without any collateral—are bearing the brunt of the slowdown, while banks that have a higher exposure to corporations have held their ground. ICICI Bank, HDFC Bank and Kotak Mahindra Bank have relatively higher exposure to retail loans and Yes Bank, although low on retail exposure, is heavily dependent on SMEs.
Companies with steady cash flows may manage to keep servicing their loans, but retail customers struggling with job losses and SMEs with a high inventory pile-up are most at risk of defaulting, analysts say.
Credit rating agency Moody’s Investors Service said on Friday that a slowdown in exports will likely affect companies engaged in sectors such as textiles, and gems and jewellery, which account for 6% of total loans in the banking system.
As of now, bankers say they are confident of maintaining loan quality.
“We take special care that we don’t lend to risky borrowers,” Bank of Barodachairman and managing director M.D. Mallyasaid.
“Whatever restructuring we have done is as per our regular course of operation. We have not taken advantage of the RBI relaxation.”
Graphics by Sandeep Bhatnagar / Mint