There have been talks about sharp deterioration of the quality of assets of Indian banks. Many analysts fear that stressed assets, or the so-called non-performing assets (NPAs), of the banking sector will rise as the economy slows and interest rates rise. When NPAs rise, banks are hit hard as they do not earn any interest on them, and on top of that, they need to set aside money for bad assets. This dents profits.
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The trigger for such an apprehension is possibly the fourth-quarter earnings of the nation’s largest lender, State Bank of India, which announced a 99% decline in net profit for the three months. The bank had to set aside a huge amount of money to cover its pension liability, provisions for home loans and standard assets, apart from rising NPAs.
Its bad assets grew by about Rs 6,000 crore during the year, from Rs 19,535 crore in March 2010 to Rs 25,236 crore in March 2011. As a percentage of overall loan assets, its gross NPAs rose from 3.05% to 3.28%. Bad assets in corporate loans grew by Rs 2,250 crore during the year and that of agriculture loans by Rs 2,203 crore. In percentage terms, its NPAs in agriculture loans nearly doubled, from 3.66% to 6.37%. That apart, engineering, textiles, gems and jewellery and real estate were some of the key sectors where the bank saw fresh NPAs.
One of the reasons behind rising NPAs is that many of State Bank’s restructured loans turned bad. Between fiscal 2009 and 2011, the bank restructured Rs 34,349 crore loans and about 15% of them turned bad. Many of these loans were restructured following the directive of the banking regulator after an unprecedented credit crisis hit the financial system in the aftermath of the collapse of US investment bank Lehman Brothers Holdings Inc.
Analysts fear that more such loans will turn bad as the world’s second fastest growing economy slows with the banking regulator following a rate tightening cycle to combat a persistently high inflation. India’s key policy rate has risen from 3.25% to 7.5% through 10 hikes since March 2010 but inflation continues to remain at a high level, leading to the belief that the Reserve Bank of India may not have reached the end of the rate tightening cycle yet. Commercial banks have been raising loan rates as the cost of money is going up. As rates rise, many borrowers may find it difficult to service loans.
That could happen if banks are not careful about choosing borrowers, but at the moment there is no need to press the alarm bells. The banking system is healthy, well-capitalized, and its bad assets have not risen in 2011 to such an extent that can cause discomfort. In fact, the rise in bad assets in 2010 was sharper than what we have seen in 2011.
In absolute terms, gross NPAs of 40 listed Indian banks have risen 20% in 2011, from Rs 75,129 crore to Rs 90,344 crore. In the previous year, the rise was 25%, from Rs 75,129 crore to Rs 60,178 crore. Most of the banks have set aside huge money to take care of bad assets and this why net NPAs have gone up 12.39% (from Rs 34,874.08 crore to Rs 39,175.94 crore) against a 25.55% rise in 2010 (from Rs 27,776.32 crore to Rs 34,874.08 crore). They could make hefty provisions as most banks’ operating profits rose handsomely. Even after setting aside money for bad debt and taxes, net profits of the 40 listed banks have risen 19.5%, or Rs 9,930.65 crore. In the previous year, their net profit had risen 16.35%, or Rs 7,102.77 crore.
In percentage terms, there has not been any dramatic rise both in gross as well as net NPAs as the loan books of most banks have grown at a healthy pace. Overall, advances of these 40 banks have grown by 24% in 2011, or Rs 7.9 trillion, against 18% in 2010, or Rs 5 trillion. Development Credit Bank Ltd has the highest gross NPAs (5.86%), followed by ICICI Bank Ltd (4.47%) and four others—Karnataka Bank Ltd, Federal Bank Ltd, Uco Bank and State Bank of India—have more than 3% gross NPAs. Eleven of these have gross NPAs of more than 2% and less than 3%, and two have less than 1%. These are Yes Bank Ltd and Corporation Bank.
The point to note is that 18 in this pack of 40 banks have shown a rise in their gross NPAs against 23 in the previous year. Development Credit Bank’s gross NPAs in 2010 were 8.69% and Lakshmi Vilas Bank Ltd’s gross NPAs were 5.12%, which has come down to 1.93% in 2011.
The same trend is seen in net NPAs, too. Uco Bank has the highest net NPAs in 2011 (1.84%), followed by State Bank (1.63%) and Karnataka Bank (1.62%). Overall, 27 of the 40 listed banks have less than 1% NPAs in 2011. The comparable number in 2010 was 20. Clearly, there is an improvement in Indian banks’ quality of assets.
A similar trend is seen if one focuses on the 14 relatively larger banks with higher market capitalization that constitute the Bankex, the banking sector index of the Bombay Stock Exchange. The gross NPAs of this set of banks—seven each from the public and private sectors—has risen 21% in 2011 against 23% in 2010. The growth in net NPAs has been 10.21%, about half of what was seen in the previous year. Their advance portfolio has grown 24% in 2011 against 18% in 2010, and net profit about 20% against 13.45%. Nine of the 14 banks have less than 1% net NPAs with HDFC Bank Ltd leading the pack (0.2%).
One, therefore, does not need to worry too much about the health of Indian banking industry.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Please email your comments to firstname.lastname@example.org