NPAs of Indian Banks may hit Rs 8 lakh cr by fiscal end

Stressed assets of Indian banks could stand at an outstanding Rs 8 lakh crore by the fiscal end and a large part of this would have gone bad given that corporate balance sheets continue to be highly leveraged and profitability weak.

Global rating agency Standard & Poor’s expects stressed assets of Indian banks to grow 11-12% in FY16. Currently, the value of stressed assets is Rs 7.4 lakh crore, going by the Reserve Bank of India’s (RBI) estimate that 10.9% of all loans are stressed. RBI deputy governor SS Mundra had said recently that as of March 2015, stressed assets in public sector banks were 13.2% while for all banks it stood at 10.9%. As such, the total stressed assets are at R7.44 lakh crore.

This would mean an addition of around R1 lakh crore to the current pile. Stressed assets include both non-performing loans and restructured advances.

“Our sense is that restructured loan would taper down while gross NPLs will go up. The total stress assets will increase about 11-12% in FY16 and of these gross NPLs would be 5% and the rest restructured,” said Amit Pandey, associate director of financial services at Standard & Poor’s.

S&P’s assessment is based on the fact that the recovery in the Indian economy has been slow and latest corporate earnings have been disappointing. Indeed, a sample of 96 non-financial companies studied by FE has seen the companies’ interest coverage ratio deteriorate to 5.21%. Slipping debt service ratio and the end of forbearance on classification of restructures loans do not bode well for banks’ balance sheets.

From April 1, RBI has stopped forbearance that allowed banks to classify loans restructured as standard and make only 5% provisioning. Although there have been several appeals to the central bank to reconsider an extension, RBI has been vehement in its denial. “We are at the end of forbearance,” said governorRaghuram Rajan in an interview with FE earlier this week.

RBI wants banks to clean up their balance sheets quickly even as they struggle with capital constraints. S&P believes that public sector banks, the worst hit in the bad loan problem, will find the going tough in terms of capital raising. In fact, banks will have to let go of opportunities to lend should they emerge later in the fiscal, said the rating agency noting internal accruals are fast diminishing.

“Banks have to reduce loan growth in line with internal capital generation,” said Pandey in a conference call. In 2014-15, the aggregate net profit of 25 public sector lenders is lower than that of 13 private banks. As such, credit growth slumped to a 22-year low in FY15 and shrunk sharply in the first month of the current fiscal. As of May 15, banks’ loan book grew just 10.2%. Rising credit costs along with a slump in loan growth has crimped banks’ interest earnings as well.

With low profits, public sector lenders will have to shrink their credit portfolio as the government is reluctant to infuse capital that matches their requirements. Tapping equity market or even Life Insurance Corporation has its own challenges for banks as most bank scrips are trading below book value in the market, said Pandey.

The problem of rising bad loans has dogged banks since 2012-13, when highly leveraged companies to which banks had lent unfettered between 2008 and 2010, began showing stress on their balance sheets and defaulting on interest payments.