For banks struggling with soured loans, there is no light yet at the end of the tunnel.
Bad loans at listed state-run banks swelled in the September quarter as many borrowers who had previously secured easier repayment terms failed to pay interest.
While bankers expressed hope that a turn for the sector is around the corner, analysts are sceptical, particularly about mid-sized state-owned banks.
Thirty-four of 39 listed banks that have reported earnings so far saw aggregate gross non-performing assets (NPAs) rise to ₹ 2.85 trillion at the end of the September quarter, according to data compiled by Mint. This was a 22.85% increase compared with the ₹ 2.32 trillion reported by this set of banks in the same quarter a year ago. The latest numbers are also 5.95% higher than the ₹ 2.69 trillion in the June quarter.
“We may see gross NPAs continue to rise as the book of restructured assets mature. In the case of some of the mid-sized banks, the proportion of restructured assets turning into bad loans may be closer to 30%," said Saswata Guha, director for financial institutions at Fitch Ratings.
In a 3 November report, Fitch had pointed out that NPA recoveries will be “time-consuming, and could take longer than banks may expect". The agency had noted that 60% of the state-run banks’ average NPA stock has been overdue for one year or more, putting these assets in the doubtful category where recoveries are considered difficult.
Overall stressed assets—which is gross NPAs plus restructured assets—may decline to 10.9% by the end of the current fiscal year, compared with 11.1% on 31 March, said Fitch. Guha said this is partly because the Reserve Bank of India (RBI) no longer allows banks to classify restructured loans as standard assets and make lower provisions against them.
Many banks reported a rise in the share of bad loans in their overall loans. At least 14 of the banks that have reported earnings so far have seen their gross NPA ratios rise, show data compiled by Mint.
The starkest example was Indian Overseas Bank (IOB), which reported a gross NPA ratio of 11%, compared with 9.4% in the June quarter. In October, RBI had initiated corrective action at the bank in light of ballooning bad loans. RBI’s corrective action at IOB was aimed at improving the bank’s internal controls and won’t affect the bank’s profitability, IOB had said in a BSE notification last month.
“Asset quality also continued to deteriorate with gross NPAs at 11% with only 35% cover (provision coverage ratio). Including restructured loans, total impaired loans are at ~20% of loans," noted brokerage house Credit Suisse in a report on 2 November.
Other banks which have seen an increase in their gross NPA ratios include Bank of Maharashtra, where gross NPAs have risen to 7.98% in September quarter from 7.86% at the end of the June quarter. At Uco Bank, gross NPA ratio rose to 7.3% from 5.2% at the end of the June quarter, and IDBI Bank saw gross bad loan ratio rise to 6.92% from 6.64% at the end of the June quarter.
“Troubles for the mid-sized lenders continue to be more acute than the larger banks," noted Guha, adding that much of the capital infusion from the government would need to go towards providing buffers for bad loans rather than growing the business. The government has said that it will infuse ₹ 25,000 crore into state-owned lenders this fiscal year.
Among the larger state-owned banks, Bank of Baroda, the country’s second largest state-owned lender, reported gross bad loans at 5.56%, up from 4.13% at the end of the preceding quarter. P.S. Jayakumar, who took over as chief executive officer in October, said the bank may face two more tough quarters before things stabilize.
While loan quality among private sector lenders remains much better, some of them have also reported higher bad loans.
ICICI Bank Ltd saw its gross NPAs rise to 3.77% from 3.68% the June quarter. While Axis Bank Ltd reported NPAs largely unchanged, the sale of ₹ 1,820 crore in bad loans to asset reconstruction companies unnerved investors, with its shares falling 7% on 28 October.
Analysts are also watching the amount of loans being refinanced through the so-called 5/25 scheme, which allows banks to extend the tenure of infrastructure loans. Some of these loans could be at risk of turning bad, feel analysts. Not all banks have declared the amount of loans refinanced under this scheme, as it is not mandatory.
“The gross NPA number is only one part of the problem with the banking industry. To get a sense of where they are in terms of asset quality, you have to look at restructured assets, 5/25 refinancing and other stressed accounts," said Hemindra Hazari, an independent banking analyst.
“If you look at bank books that way, the quality is quite bad. Bank books are obviously going to reflect the stress in companies they lend to. If they don’t, then their accounts need to be examined," he added.
To be sure, not all banks have reported deterioration in asset quality. State Bank of India, for instance, reported a lower gross NPA ratio of 4.15% compared with 4.29% in the June quarter. Arundhati Bhattacharya, chairman of the country’s largest lender, struck a cautious note, saying that while the bank is reaching the “bottom of the pile", there could be some trouble in the quarters ahead.
“Going forward, the prognosis should be good. I would still put a caveat saying there are one or two large accounts where we are trying to work out something. If it happens, it happens. Otherwise, we will have to take those hits. But I would like to assure you that even those accounts, the assets are very good. So, even if there is a hit, it will be temporary in nature," Bhattacharya told reporters at a briefing on Friday.