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| NPAs pushing major banks into losses | | Situation not serious, but alarming! | | Mohammad Jarjees
The performance of Indian Banking Industry is seriously at the receiving end. The volume of non-performing assets (NPAs), in simpler terms called bad loans has already crossed over Rs.4 lakh crore mark. In comparison to the volume of NPAs in 2009, these bad loans have rose nearly 300%.
Let me share an apt statement of Raghuram Rajan, the Reserve Bank of India Governor. Rajan said that disease ailing the banking industry require "surgery" and not "band aid". 'The cure will be long and painful but at the end of it, hopefully the banks will emerge squeaky clean once again.'
He was commenting on the unprecedented amount of pressure owing to non-performing assets on the Indian banking industry. At the moment, the USD 1.5 trillion Indian banking sector is facing not serious, but alarming situation owing to the unprecedented increase in the non performing assets (NPAs) of the banks.
The piling up of bad assets owes its origin to indiscriminate lending at the cost of due diligence and credit perception. Almost every bank resorted to this to make their balance sheets fatty and impressive. The NPA problem turned into a crisis when the banks exhibited their tendency to hide them and also overlooking recognition of NPAs at the appropriate time. While making their balance sheets look better, the banks irrationally and continuously restructured loans which were near default. For stressed loans, the banks were not supposed to do provisioning. What we observed that most of the restructured loan portfolio finally ended up becoming NPAs. This under reporting of the NPAs turned a disease which was malignant to chronic and eventually acute.
It was in the backdrop of this hiding-game of NPAs, the RBI asked the banks to declare their stressed assets to the RBI. Based on an asset quality review, the RBI gave guidelines to banks to declare significant portions of their stressed assets as NPAs. Precisely, the RBI, in a bid to prevent a wider systemic collapse, has given the banks time till March 2017 to clean up their balance sheets and provide for all stressed assets. This is the move which is going to convert the 'serious' situation of the banks into an 'alarming' situation.
Notably, five of the six public sector banks that declared their results on Friday reported losses for fourth quarter ended March 2016 as non performing assets (NPAs) continued to pile on after the Reserve Bank of India's ( RBI) asset quality review (AQR). Bank of Baroda, Central Bank of India, Allahabad bank, UCO Bank and Dena Bank reported a loss for the second consecutive quarter. Union Bank of India was the only exception reporting a small net profit in March quarter though down 78% from a year ago and declared 19.5% dividend.
None of the five loss making banks announced dividend. The largest of the lenders, Bank of Baroda posted a loss of Rs 3,230 crores almost repeating its December 2015 performance when it announced a record Rs 3,342 crore loss. For the full fiscal year ending March 2016, the bank posted a record loss of Rs 5067 crore.
Gross NPAs increased to 9.9% from 3.7% and in actual terms crossed the Rs 40,500 crore mark up from Rs 16,261 crore in March 2015. UCO Bank reported a record loss of Rs 1,715 crore. The lender's gross NPAs doubled to Rs 20,907 crore from Rs 10,265 crore it reported last fiscal, leading to an gross NPAs rising to 15.43% of the bank's loan book up from 10.98% reported in the quarter ended December. Allahabad Bank was also plagued with the same problems as amid rising asset quality stress. It reported a loss of Rs 581crore for the March quarter, compared to a profit of Rs 203 crore a year ago as provisions rose to Rs 2,487 crore. The bank's gross NPA ratio rose to 9.76% from 6.40% in the preceding quarter and 5.46% a year ago.
However, alarming situation in which our banking industry is gripped does not mean a total collapse. Mounting NPAs doesn't mean money won't come back to the banks. Yes, it will definitely take time for the banks to realise their money blocked in bad assets.
During financial sector reforms in the late 90s, the Indian banking system had faced a challenge similar to the one it is facing now. And the banks tackled the issue, which was of a pretty large magnitude, and came out of it with remarkable ease. Industry experts are not losing hope of 'charming revival' of banks in the next three four quarters.
What is actually at the heart of this problem? Let me borrow some expert opinion to answer this question. A dissection of the problem would reveal that the vast majority of this problem is really the exposure that banks have in projects which are under implementation. When such projects suffer time and cost overrun primarily because of external factors, debt sustainability becomes a question. That does not mean the borrowers cannot service any debt or that the banks have to write it off completely these are hard assets on the ground. Therefore, banks may need to restructure the debt. In some cases, restructuring will also have to be accompanied by a change of management.
However not everything can be blamed on external environment. There will be instances where a better managerial approach could have enabled the banks to better cope with a challenging external environment.
To conclude, I don't see worst is yet over. The next big challenge for the banks would be to figure out how to aggregate these bad/ stressed assets and how quickly they get these assets into the performing mode. |
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