Graphic: Mint
Graphic: Mint

Where will future stress come for banks?

The June quarter results of lenders were marked by a slowdown in slippages, a sign that stress in the banking sector is finally reducing

Indian banks are in the middle of an unprecedented clean-up and resolution of bad loans. Even as the toxic pile of 10.4 trillion is hacked down through various resolution methods, fresh stress will emerge. The adjoining chart shows where this will come from. As of March, 6.6 trillion were loans where repayments have been irregular. These are essentially what the Reserve Bank of India (RBI) calls special mention accounts.

A further 3.1 trillion worth of loans are partially recognized as bad. In other words, not all banks have labelled these accounts as bad in their books. This stock can swing either way depending on whether the borrower is able to fix the problem.

TransUnion CIBIL believes that about 1.4 trillion worth of loans have a high chance of slipping over the next few quarters. Of this, 1 trillion is with public sector banks while the rest is on the books of private sector lenders.

Part of this may have reflected in the slippages for the June quarter reported by banks. The June quarter results of lenders were marked by a slowdown in slippages, a sign that stress in the banking sector is finally reducing.

But banks cannot escape stress unless corporate balance sheets decisively improve and interest cover ratios increase across the industry.

It will be well over a year before banks can show a clean balance sheet

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