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Business News/ Industry / Banking/  As small firms default, slippages outpace recoveries at PSU banks
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As small firms default, slippages outpace recoveries at PSU banks

Ratio of recoveries and upgrades to gross NPAs in December quarter at public sector banks was 14%, compared with 40% in the June quarter

Gross NPAs at 40 listed banks in the December quarter rose 20.5% to Rs2.93 trillion from Rs2.43 trillion a year earlier. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
Gross NPAs at 40 listed banks in the December quarter rose 20.5% to Rs2.93 trillion from Rs2.43 trillion a year earlier. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

Mumbai: Loans are turning bad faster than the pace of loan recovery at state-owned banks as small companies default on payments against a still-difficult macroeconomic backdrop, bankers say.

According to data collated by ratings company Icra Ltd, the ratio of recoveries and upgrades to gross non-performing assets (NPAs) in the October-December quarter at public sector banks was 14%, compared with 40% in the April-June quarter.

Gross NPAs at public sector banks rose from 4.6% of their advances as of 30 June to 5.1% in December, Icra said in a report on 19 February.

Gross NPAs at 40 listed banks in the December quarter rose 20.5% to 2.93 trillion from 2.43 trillion a year earlier, according to data available from Capitaline database.

“There are only two ways that banks can have recoveries, either you convince the borrower to pay up some part of the loan and settle the amount, or you initiate action against the account and sell assets. This year, the activity on both these fronts has been slower," said a senior executive at a public sector bank on conditions of anonymity.

Slower economic growth and delays in securing government approvals in the past three years caused many projects to stall, crimping corporate cash flows and hurting the ability of borrowers to repay debt, leading to the pile-up of bad loans at banks.

“Last year a number of large assets had been under stress and had turned to restructuring; as an after-effect, smaller companies in sectors like steel, construction, textile and power are now slipping into the NPA category since they were dependent on these larger companies for their business," the banker cited above said.

“Recovery on the other hand is slow because the economy has barely improved. The smaller borrowers will usually delay repayment or look to exit his business,"

In the case of the country’s largest lender State Bank of India (SBI), outstanding NPAs to small and medium enterprises (SME) stood at 16,427 crore and made up 8.05% of gross advances, as on 31 December. Outstanding bad loans in the agriculture segment stood at 12,100 crore, more than 10% of gross advances.

In the case of Central Bank of India, nearly 600-700 crore of the 1,100 crore worth of slippages (new loans turning bad) in October-December were at accounts with loans under 5 crore each.

“In our bid to control big accounts, these smaller accounts have slipped. In the current quarter we have put our focus on these smaller accounts and are expecting better recovery there," said a senior official at Central Bank of India on conditions of anonymity.

Large assets usually receive the focus they require, in terms of new loans or restructuring existing loans, thanks to the joint lenders’ forum (JLF) mechanism put in place by the Reserve Bank of India (RBI) to detect and tackle stressed loans early, a third banker said.

In the case of smaller loans, stress often gets overlooked, leading to a downgrade in the asset classification for borrowers before they are restructured, the banker said, also on conditions of anonymity.

In the first nine months of the current fiscal year, the corporate debt restructuring (CDR) cell has already approved the debt recast of 44 cases with loans worth over 50,000 crore.

ABG Shipyard Ltd’s 11,000 crore debt recast was one of the largest to have been approved this fiscal year.

Similarly, IVRCL Ltd’s 7,000 crore debt recast plan also received approval from the CDR cell.

Apart from this, sugar manufacturer Bajaj Hindusthan Ltd’s 6,500 crore debt is being restructured outside the CDR cell. In FY14, 75 cases with loans worth over 1 trillion were approved for restructuring by the cell; a number of these were large accounts.

Bankers are hopeful that things will change as the new government moves to put in place policy changes and accelerate the approvals process for industrial projects, and as economic growth speeds up.

Experts say that the average ratio of recovery and upgrades has been between 30-50% of the gross bad loans for the banking sector.

“There is no reason why they should not be able to achieve that this year," said Ananda Bhoumik, senior director at India Ratings and Research Pvt. Ltd, the India arm of Fitch Ratings.

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Published: 06 Mar 2015, 12:39 AM IST
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