India's public sector banks' bad loans or NPAs may cross 10%: RBI. A "troublesome pressure" on economy?
The Reserve Bank of India (RBI) has said that risks to India’s banking sector have sharply gone up since December 2015, with the gross non-performing assets (GNPAs), or bad loans, rising “sharply to 7.6 per cent of gross advances in March 2016 from 5.1 per cent in September 2015”, adding, GNPAs may see a further deterioration over the next one year.
A non-performing asset (NPA), in simple terms, is tagged as “non-performing” when it ceases to generate income for the lender – or loans that are in jeopardy of default. Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset.
Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Experts say, troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs.
Reportedly, for every Rs 100 parked in shares of public sector banks, investors carry the burden of Rs 150 as NPAs or bad loans, which have cumulatively ballooned to Rs 4 lakh crore, or 1.5 times the market value of these lenders.
Providing three different scenarios – baseline, medium stress and severe stress – to analyse GNPAs, the RBI says, “The macro stress tests suggest that under the baseline scenario, the GNPA ratio may rise to 8.5 per cent by March 2017 from 7.6 per cent in March 2016. If the macro situation deteriorates in the future, the GNPA ratio may increase further to 9.3 per cent by March 2017.”
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| PSBs: Public Sector Banks; PVBs: Private Sector Banks; FBs: Foreign Banks |
Saying that the “the credit and deposit growth of scheduled commercial banks (SCBs) slowed significantly during 2015-16”, the RBI, in its Financial Stability Report (FSR) June 2016, notes that their “risk weighted assets (RWA)” density declined during this period, largely reflecting re-classification of restructured advances to NPAs.”
“Among the bank-groups, public sector banks (PSBs) may continue to register the highest GNPA ratio”, the RBI says, adding, “Under the baseline scenario, their GNPA ratio may go up to 10.1 per cent by March 2017 from 9.6 per cent as of March 2016. However, under a severe stress scenario, it may ncrease to 11.0 per cent by March 2017.”
As for the private sector banks ((PVBs), the situation is not as bad, the RBI says: “Under the baseline scenario, the GNPA ratio of PVBs may increase to 3.1 per cent by March 2017 from 2.7 per cent as of March 2016, which could further increase to 4.2 per cent under a severe stress scenario.”
The RBI further said, “A macro stress test of sectoral credit risk revealed that in a severe stress scenario, among the select seven sectors, iron and steel industry (which had the highest GNPA ratio at 30.4 per cent as of March 2016) could see its GNPA ratio moving up to 33.6 per cent by March 2017 followed by engineering (from 10.9 per cent to 15.9 per cent) and infrastructure (from 7.1 per cent to 13.4 per cent)”. RBI data also show that, contrary to the general belief, GNPAs in agriculture the lowest all other sectors, suggesting, farmers – despite higher risks – service their debts much better than industrialists.
“Among the bank-groups, public sector banks (PSBs) may continue to register the highest GNPA ratio”, the RBI says, adding, “Under the baseline scenario, their GNPA ratio may go up to 10.1 per cent by March 2017 from 9.6 per cent as of March 2016. However, under a severe stress scenario, it may ncrease to 11.0 per cent by March 2017.”
As for the private sector banks ((PVBs), the situation is not as bad, the RBI says: “Under the baseline scenario, the GNPA ratio of PVBs may increase to 3.1 per cent by March 2017 from 2.7 per cent as of March 2016, which could further increase to 4.2 per cent under a severe stress scenario.”
The RBI further said, “A macro stress test of sectoral credit risk revealed that in a severe stress scenario, among the select seven sectors, iron and steel industry (which had the highest GNPA ratio at 30.4 per cent as of March 2016) could see its GNPA ratio moving up to 33.6 per cent by March 2017 followed by engineering (from 10.9 per cent to 15.9 per cent) and infrastructure (from 7.1 per cent to 13.4 per cent)”. RBI data also show that, contrary to the general belief, GNPAs in agriculture the lowest all other sectors, suggesting, farmers – despite higher risks – service their debts much better than industrialists.
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