How bad are bad assets of banks?
Gross NPAs of 11 banks in BSE’s Bankex have risen in the December quarter over the preceding three months
Tamal Bandyopadhyay
State-run United Bank of India on Friday reported a Rs.1,238.08 crore net loss in the December quarter after setting aside Rs.1,857.83
crore to provide for bad loans. Following the hefty provision, its net
non-performing assets (NPAs) were pegged at 7.52% of total advances. The
Kolkata-based bank’s gross NPAs are much higher at 10.82%—reminiscent
of the banking industry’s health in the late-1990s when high interest
rates and tight liquidity led to large-scale defaults by corporations
and banks’ bad assets and restructured loans zoomed.
While United Bank’s gross bad assets are in the double digits, there are six other state-run banks that have more than 5% gross NPAs—State Bank of Mysore (6.56%), Central Bank of India (6.48%), Andhra Bank (5.55%), Allahabad Bank (5.47%), IDBI Bank Ltd (5.44%) and Indian Overseas Bank (5.27%). State Bank of India,
the nation’s largest lender, is yet to announce its December-quarter
earnings. In the September quarter, its gross NPAs were 5.64%. Punjab National Bank had 5.14% gross NPAs in the September quarter but managed to bring it down to 4.96% in the three months ended 31 December.
After setting aside hefty sums of money that dented profits, at least five Indian banks now have more than 3% net NPAs.
Let’s take a closer look at the universe of Bankex, 12 of the 41 listed banks that constitute BSE Ltd’s banking index. Since State Bank of India
has not yet announced its earnings, we can look at the health of 11
banks. Collectively, their net NPAs have more than doubled in past eight
quarters—between March 2012 and December 2013—from Rs.16,275 crore to Rs.34,792 crore.
Among these banks, Bank of Baroda is the worst affected. Its net NPAs have grown from Rs.1,544 crore to Rs.6,634
crore in past eight quarters. The gross NPAs of this set of bank have
not doubled during this period but risen substantially, from Rs.38,737 crore to Rs.66,142 crore. Here too, Bank of Baroda has put up the poorest show. Its gross NPAs have grown from Rs.4,465 crore to Rs.11,936 crore.
During this period, operating profits of these 11 banks collectively have risen from Rs.17,785 crore to Rs.21,779 crore. Despite that their net profits virtually remained flat—Rs.10,386 crore in March 2012 and Rs.10,593 crore in December. The reason behind this is about 50% growth in provisions. In March 2012, these banks had set aside Rs.4,149 crore to take care of bad assets. This amount has risen to Rs.6,310
crore in December 2013. In other words, had these banks not been
saddled with bad assets and not required to set aside money, their
profits would have risen. The state of affairs in banks outside Bankex
is far worse.
One worrying factor about the health of Indian banks is
that the private banks, which have till now managed to remain insulated
from the phenomenon of bad assets, are showing cracks. This is not a
happy sign. Gross NPAs of five of the 11 banks in Bankex have risen in
the December quarter over the preceding three months and four of them
are private banks. Similarly, net NPAs of seven banks in this pack have
risen in the December quarter and five of them are private banks. For
instance, net NPAs of Kotak Mahindra Bank Ltd has risen from 0.96% to 1.10%. The list includes ICICI Bank Ltd (from 0.85% to 0.94%); IndusInd Bank Ltd (from 0.22% to 0.31%); Axis Bank Ltd (from 0.37% to 0.42%); and Yes Bank Ltd (from 0.04% to 0.08%).
Indeed, the quantum of growth is not high—a few basis
points for many of them—but could signify the beginning of a spillover
of bad assets from public sector banks to their counterparts in the
private sector. This is bound to happen if the Indian economy takes
longer to get back its growth momentum. If the slowdown persists for
longer, borrowers’ ability to pay back loans will be severely affected
and both public and private banks will suffer. Higher bad loans affect
banks’ profitability as they need to set aside more money to take care
of such loans. As a result of this, they would also need more capital as
otherwise they will not be able to grow their loan book. Taxpayers’
money is used to recapitalize public sector banks almost every year but
since that is not possible for private banks, if they get affected by a
rise in bad loans in their books, it might turn out to be a threat to
systematic stability. A stable government at the centre after 2014
general elections, faster project clearances and growth impulse coming
back in Asia’s third largest economy are key to financial sector
stability in India.
On its part, the Reserve Bank of India (RBI) has taken
the first step to protect the banking system by allowing banks to use up
to one-third of the amount they have set aside as the so-called
counter-cyclical buffers to make provisions for bad loans. Banks are
being allowed to use such reserves to make specific provisions for NPAs,
as per the policy approved by their board of directors. This is the
first instance of the central bank allowing commercial banks to use
emergency provisions since they started creating the reserves in 2010.
Creation of such a reserve was under discussion since 2006 when Y.V. Reddy was the RBI governor.
RBI has also come out with a framework for a corrective
action plan that will offer incentives to banks for early identification
of stressed assets, timely revamp of unviable accounts and fast steps
for recovery or sale of assets when a loan faces the risk of turning
bad.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank 
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