Mumbai: Rising interest rates, adverse regulatory environment in some businesses such as mining, and migration to a computerized calculation of bad debts have led to the gross non-performing loans (or non- performing assets, NPAs) of listed Indian banks crossing Rs1 trillion in the quarter ended September.
Gross non-performing loans for 36 listed banks have swelled to Rs1.07 trillion, up 33% from last year. More importantly, the rise in bad loans has been the fastest, quarter-on-quarter, in at least the past five years.
Data for the 36 banks analysed by Mint shows that they added Rs14,273.62 crore of bad loans in the July-September period, up 15% from the quarter ended June.
This is the fastest increase in bad loans since the quarter ended June 2006, according to data sourced from Capitaline.
Forty banks are listed in India. But four banks have been excluded from the Mint analysis because three of them—United Bank of India, Central Bank of India and Punjab and Sind Bank—have listed recently, which means comparable data is not available for them, while Lakshmi Vilas Bank Ltd is yet to declare its quarterly result.
Analysts said the main reason for rising bad loans is an increase in interest rates over the last one-and-a-half years.
The Reserve Bank of India has hiked its effective policy rate 525 basis points since March 2010 to fight inflation. One basis point is one-hundredth of a percentage point.
“Bad loans have come from all around, be it SME (small and medium enterprises), agriculture loans or even industry, especially iron and steel, because interest rates have been rising,” said Vaibhav Agrawal, vice-president (research) at Angel Broking Ltd.
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Mint’s Joel Rebello says public sector banks account for 97% of the bad loans in the September quarter and that they will need to hire more manpower to recover loans.
The brunt of the rise in bad loans this quarter has been borne by public sector banks with 97%, or Rs13,901.30 crore, of the Rs14,273.62 crore addition in bad loans coming from them.
“Forty percent of public sector bank loans go to priority sector, but they constitute 60% of NPAs,” Agrawal said, adding that this time many mid- and small-cap firms have been squeezed because of rising rates and interest costs eat up 50-60% of their earnings before tax.
Under government norms, Indian banks have to give 40% of their loans to the so-called priority sector, which includes agriculture, SMEs, exports and home loans up to Rs15 lakh.
Murali Gopal, an analyst with Brics Securities Ltd, said businesses linked to metals and mining have also been hit due to an adverse regulatory environment.
“Demand and consumption have also slowed due to macro factors, but sectors such as mining are in trouble due to bans in states like Karnataka and Orissa,” he said.
Iron ore mining has been banned in Karnataka because of alleged corruption involved in getting environmental and state government approvals.
Gopal said the rise in bad loans should not come as a surprise because “banking is a cyclical business and this cycle has followed a relatively benign environment for the last two years”.
However, investors are not too enthused by the rise in bad loans. State Bank of India (SBI) shares dropped 6.76% on Wednesday after the bank said gross non-performing loans rose to Rs33,946 crore from Rs27,768 crore in the quarter ended June.
Local stock markets were shut on Thursday.
SBI saw about Rs8,000 crore of its assets turn bad this quarter. Net of recovery, the number stood at Rs6,178 crore.
“On the back of continued stress in corporate, SME and agri sectors, annualized slippage ratio remained elevated at 3.68%,” an SBI statement said.
The bank saw NPAs rising from largely export-oriented sectors, iron and steel, agro-based business, and government-sponsored schemes.
“We still see pressure on the asset quality, but we have provided adequately..., but broadly there is stress,” SBI chairman Pratip Chaudhuri said, warning that the whole banking industry could see the same problem in coming quarters. “In the NPA scene what SBI experiences today, other banks experience tomorrow. It hits them with a lag.”
SBI’s warning came on the same day global rating agency Moody’s Investors Service downgraded the outlook on India’s banking sector to negative from stable, saying a slowing domestic economy and chaos in global markets could lead to more bad loans, impact banks’ ability to raise money and profitability.
SBI is not the lone bank that is seeing rising bad loans. Among others, both Union Bank of India and Bank of India have seen a rise in bad loans in the quarter ended September.
Union Bank shares lost 11.56% on 24 October after the lender said bad loans rose to Rs1,800 crore, out of which about Rs700 crore were fresh slippages, pushing up its NPA ratio to 3.49% for the quarter.
Bank of India’s bad loans rose to 3.02% in the quarter from 2.64% a year ago, leading to a 39% increase in provisions. It had slippages of Rs4,500 crore in the period compared with Rs1,440 crore a year ago.
Punjab National Bank has also converted Rs2,500 crore of short-term loans into long-term ones from the power sector to avoid imminent defaults.
Dinesh Shukla, research analyst with Sharekhan Ltd, said public sector banks have also been hit because they have migrated to a computerized system of bad loan classification.
“Small loans from agriculture and SMEs, which were not recognized manually, are also coming up,” he said.
Analysts said high interest rates and an adverse macroeconomic environment could mean more bad loans for the rest of the fiscal year, forcing banks to set aside more money and put more people towards loan recovery.
“I expect banks to increase provisions by a further 15% to 20% in the near term,” said Agrawal of Angel Broking.
Shukla said that higher bad loans have a potential to impact banks’ business. “We are already seeing some slowdown in business, and because of bad loans, banks like Union Bank and Bank of India will put more people on loan recovery,” he added.