Home / Industry / Restructured loans return to haunt banks

Mumbai: Loans restructured by banks in the last couple of years have come back to haunt them in the form of rising non- performing assets (NPAs), even though bankers and analysts continue to expect asset quality to improve steadily as economic growth revives.

The 40 listed Indian commercial banks added 24,024 crore in gross NPAs during the quarter ended December 2014—the second highest since March 2010 after the record 28,363 crore addition during the quarter ended June 2013.

Data has been taken since 2010 because that was the year the last two public sector banks —United Bank of India (UBI) and Punjab & Sind Bank—were listed.

Interestingly, this quarter, even private sector banks have reported an increase in gross NPAs, led by ICICI Bank Ltd, as loans restructured in the past eventually turned bad. The 16 listed private sector banks added 3,029 crore in gross NPAs in the December quarter, the highest since June 2007, data analysed by Mint showed. ​

Bank of India (BoI) with 2,567 crore and Bank of Baroda (BoB) with 2,395 crore are the banks with the maximum amount of NPAs added during the quarter in absolute terms. ICICI Bank, which has added 1,536 crore in gross bad debt, during the quarter is number five among all banks.

To be sure, gross NPAs as a percentage of the overall loan portfolio, which is a clearer indication of the asset quality across individual banks, vary.

SBI’s gross NPAs as a percentage of total loans, were at 4.9%, down from 5.73% in the year-ago quarter, but flat since the September quarter’s 4.89%. ICICI Bank reported a gross NPA ratio of 3.40% versus 3.05% a year ago.

United Bank of India, with a gross NPA ratio of 12.03% at the end of December quarter, has reported the worst asset quality. Among other large banks, Bank of Baroda’s gross NPA ratio rose to 3.85% from 3.32% a year ago, Punjab National Bank’s NPA ratio rose to 5.97% from 4.96% a year ago and Canara Bank’s NPA ratio rose to 3.35% from 2.79%.

Ananda Bhoumik, senior director, India Ratings & Research Pvt Ltd, said NPAs had increased as many banks have recognised previously unstated NPAs and also as loans restructured within the last two years had turned non-performing.

“These are problem assets which were restructured. But I do not see this problem prolonging because of the positive economic tailwinds. Also companies are not leveraging at the level seen previously but are finding ways to cut debt."

Bhoumik said on an average 20% to 25% of restructured loans had turned into NPAs and he expects the same trend to continue.

Stressed assets across the Indian banking sector have risen as a consequence of the slowdown in the economy and in part due to poor credit evaluation procedures across some parts of the sector.

According to the latest data from the Reserve Bank of India (RBI), overall stressed assets, including restructured assets and bad loans, have gone up to 10.7% as of the end of September 2014 compared to 10% in March 2014.

The reported level of bad loans is also set to go up starting fiscal 2016, as forbearance towards restructured loans from RBI will be withdrawn starting 1 April. Post that, fresh restructured loans will be counted as NPAs.

According to some analysts, banks are also trying to clean up their books in anticipation of a pickup in lending opportunities in the months and years ahead as the government prepares to unveil its budget for the next fiscal on 28 February.

“This will be the first full budget of the government and banks are trying to clean their books to take whatever opportunity that comes their way. This is also a good time to show bad loans because the market is buoyant and despite the rise in bad loans, bank stocks are doing well," said Purvesh Shelatkar, head of research at BoB Capital Markets Ltd.

The latest rise in NPAs has made bankers cautious in predicting a recovery in the sector.

After announcing the bank’s earnings on Friday, State Bank of India’s chairperson Arundhati Bhattacharya, said that it may take another two to three quarters before the pain of NPAs subsides.

Bank of India chairperson V. R. Iyer said that the third quarter had been challenging and the bank doesn’t expect the situation to improve significantly in the next two quarters as well.

Chanda Kochhar, managing director and chief executive officer of ICICI Bank, echoed that view.

“We expect this trend of restructured loans slipping into NPAs to continue at least for the next couple of quarters. The positive impact of the improvement in sentiment will only be seen after a lag, after the steps taken by the government to revive the GDP (gross domestic product) growth results in improving cash flows for companies," she said in a post results conference call with journalists on 30 January.

According to Rajiv Pathak, banking analyst at Dolat Capital Markets Ltd, the rise in NPAs is not alarming because these loans were always part of the “stressed loans" group.

“These loans were restructured in the last one or two years (and) have slipped because the assumed recovery in these loans has not happened. The addition of fresh NPAs is relatively lower," Pathak said.

Both Pathak and Shelatkar expect banks to push for restructuring in the current quarter before the 1 April deadline.

“India has not seen such an elongated slowdown in GDP growth for many years and hence it will take some time before the additions to delinquent assets slows down to a sustainable level," Pathak said.

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