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MUMBAI : Swelling legacy bad loans, which require lenders to set aside higher sums with every passing year, has emerged as a new worry for State Bank of India (SBI), indicating its limited success in recovering these loans.

Legacy bad loans made up 65% of India’s largest lender’s overall bad loan portfolio in FY21, over 5 percentage points higher than the previous year. Such ageing loans require lenders to set aside provisions of 25-100%, eroding profit.

The increase signals that while the amount of gross bad loans declined, the quantum of doubtful assets with lower chances of recovery stood at 82,847.21 crore.

State Bank of India chairman Dinesh Khara.
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State Bank of India chairman Dinesh Khara. (Photo: Mint)

Central bank norms require lenders to classify non-performing assets (NPAs) into three buckets, depending on how long they have remained unpaid. These are sub-standard, doubtful, and loss assets. As bad loans fester, the chances of them being recovered also fade. Once they reach the loss asset category, banks write them off.

An analyst tracking SBI said these numbers should be seen in consonance with the bank’s technical write-off numbers, or what it calls advances under collection account (AUCA). Technical write-offs are assets that have been fully provided for and removed from the book, although recovery efforts continue. “Over 1.72 trillion of technical write-offs are outstanding at the moment, higher than 1.66 trillion in FY20. However, the bank has a high provision coverage ratio, which has led to the market confidence," the analyst said on condition of anonymity.

Recoveries declined in FY21 as covid and lockdown curbs made it difficult for field executives to operate. Total recoveries and loan upgrades stood at 27,930 crore in FY21, 20% below its FY20 figures. Upgraded loans are those that were moved from the NPA category to the standard category once repayments were regularized.

To be sure, the state-run bank saw an improvement in overall asset quality in the fourth quarter of FY21 as gross NPAs as a percentage of total advances stood at 4.98%, down 117 bps from a year ago. The gross bad loan ratio is at the lowest level in five years, it said.

What also worked in its favour was the ability to contain slippages and debt recasts much below the forecast of 60,000 crore in FY21. Aggregate slippages or incremental bad loans and debt recasts were at 46,416 crore in FY21.

“We do not see any concern on the asset quality front, and we expect that trend to continue. We have made additional provisions for restructuring applications that are yet to be implemented and also for general contingencies," State Bank of India chairman Dinesh Khara said at the bank’s earnings announcement.

Indian banks had a bad loan pile of 7.38 trillion as of 31 December, and the figure for 31 March will be available after all banks reports their financials. As announced in the Union budget on 1 February, the government wants to create a bad bank to house bad loans of 500 crore and above, in a structure that will contain an asset reconstruction company (ARC) and an AMC to manage and recover dud assets. Lenders sell stressed loans to ARCs at a discount, either in exchange for cash or a mix of cash and security receipts. These are redeemable as and when the ARC recovers the specific loan. However, the problem with selling older NPAs is that they tend to have a significantly lower recovery rate than fresh bad loans.

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