Banking system’s bad loans on the rise.Now Rs 7.05 lakh Crore of Loans fall in Stressed Category

Bad loans of the banking system have risen alarmingly in fiscal year 2015 due to continued economic slowdown, according to the Reserve Bank of India.

The stressed assets ratio (gross non-performing assets plus restructured standard advances to gross advances) for the system as a whole rose to 10.9 per cent at the end of March 2015 compared with 10 per cent in March last year.

This means that nearly ₹7.05-lakh crore worth of bank loans now fall in the stressed category compared with ₹5.91-lakh crore last year.

According to the central bank’s Financial Stability Report, five sub-sectors — infrastructure, iron and steel, textiles, mining (including coal), and aviation — had significantly higher levels of stressed assets.

SS Mundra, Deputy Governor, RBI, in a recent speech, had said that though on the whole the banking system remained resilient, its asset quality was under pressure due to continued economic slowdown.

When a loan account ceases to generate income for a bank, it is termed a non-performing asset (NPA). NPAs and restructured assets eat into the profitability of banks as they have to set aside money to cover defaults in loan repayments.

As per preliminary data received by the RBI, the gross NPAs have increased to 4.45 per cent of gross advances for the banking system from 4.10 per cent in March-end 2014. The net NPAs (after making provisions) have also climbed to 2.36 per cent of net advances from 2.20 per cent.

“When seen in isolation, the NPA ratios do not appear very distressing. However, if we add the portfolio of restructured assets to the GNPA numbers, this rises alarmingly,” explained Mundra.

He also pointed out that the level of distress is not uniform across bank groups and is more pronounced for public sector banks (PSBs).

The gross NPAs for PSBs as on March 2015 stood at 5.17 per cent while the stressed assets ratio stood at 13.2 per cent, nearly 230 basis points more than that for the banking system.

Mundra referred to the observations made in the IMF’s Global Financial Stability Report that 36.9 per cent of India’s total debt is at risk, which is among the highest in the emerging economies while India’s banks have only 7.9 per cent loss absorbing buffer, which is among the lowest.

“While these numbers might need an independent validation, regardless of that, it underscores the relative riskiness of the asset portfolio of the Indian banks,” he said.