In­dian banks' bad as­sets rise alarm­ingly

The Pak Banker - - COMPANIES/BOSS -

Bad as­sets is one of the big­gest chal­lenges con­fronting the In­dian bank­ing sec­tor, but gov­ern­ments have for years main­tained an os­trich-like at­ti­tude, re­fus­ing to take it head-on.

Stressed as­sets of In­dian banks - es­pe­cially state-owned lenders, who ac­count for al­most 85pc of bad loans - have grown phe­nom­e­nally, but the govern­ment has failed to tackle the loom­ing cri­sis. The gross non-per­form­ing as­sets (NPAs) of 39 listed banks amounted to Rs3.4tr to­wards the end of the Septem­ber quar­ter. (This does not in­clude re­struc­tured as­sets of banks). To­wards the end of the pre­vi­ous fis­cal (March 31, 2015), gross NPAs stood at a lit­tle over Rs3tr, ac­count­ing for 4.6pc of to­tal ad­vances. Six months later it shot up by Rs400bn and con­sti­tutes 5.1pc of to­tal ad­vances.

And tak­ing into ac­count stressed as­sets, the fig­ure has gone up to 11.3pc. How­ever, th­ese are for­mal fig­ures; in­dus­try es­ti­mates are that stressed as­sets are at least two to three times higher and could cross the Rs7.5tr-mark.

Much of the cri­sis has been caused by reck­less lend­ing by banks to sev­eral sec­tors. Ac­cord­ing to the Fi­nan­cial Sta­bil­ity Re­port of the Re­serve Bank of In­dia (RBI), a hand­ful of sec­tors - min­ing, iron and steel, in­fra­struc­ture in­clud­ing power and civil avi­a­tion and tex­tiles - con­sti­tute more than half of to­tal stressed loans, though their share of to­tal ad­vances is just 25pc. The prob­lem of bad loans is ex­pected to worsen over the next few years. Last week, In­dia Rat­ings, a Fitch group com­pany, es­ti­mated that im­paired as­set loans are likely to rise to 12.5pc by March 2017, fol­low­ing the RBI's strict norms to recog­nise stress in the sys­tem.

The rat­ings agency said banks may have to take a ' hair­cut' of Rs1tr to re­vive stressed as­sets (a hair­cut is the dif­fer­ence be­tween the mar­ket value of an as­set used as col­lat­eral and the loan amount). Once a loan turns bad, banks sell off the col­lat­eral as­set at a dis­count to as­set re­con­struc­tion com­pa­nies.

In­dia Rat­ings es­ti­mates that about a third of cor­po­rates who have bor­rowed from banks are reel­ing un­der stress. "Th­ese cor­po­rates form 21pc of sys­tem credit, of which 9pc have been recog­nised as NPAs or re­struc­tured ac­counts in FY15, 2.5pc are in the process/pipe­line of SDR or 5:25 re­fi­nanc­ing, 1pc have been sold to as­set man­age­ment com­pa­nies or are in talks for sale, and the bal­ance 8.5pc are yet to be recog­nised by banks," said the agency. In 2014-15, the RBI ini­ti­ated sev­eral schemes in­clud­ing a strate­gic debt re­struc­tur­ing (SDR) scheme, tight­en­ing the cor­po­rate debt re­struc­tur­ing (CDR) mech­a­nism and es­tab­lish­ing a joint lenders' fo­rum. It urged banks to clean up their books by re­veal­ing the true pic­ture and ca­joled the lenders to in­crease pro­vi­sion­ing on stressed as­sets. The RBI also in­tro­duced a 5:25 scheme, with loans to be amor­tised over 25 years and with a re­fi­nanc­ing op­tion af­ter ev­ery five years. Banks were also em­pow­ered to take ma­jor­ity con­trol of de­fault­ing firms un­der the SDR. Over a dozen com­pa­nies were ac­quired by banks un­der the SDR scheme, but most of the pro­mot­ers had stripped off what­ever as­sets they could lay their hands on be­fore hand­ing con­trol to the lenders.

THE Na­tional Demo­cratic Al­liance (NDA) govern­ment is now con­sid­er­ing set­ting up a 'bad bank,' or an ARC to trans­fer the bad loans of pub­lic sec­tor lenders and to en­able them to clean up their bal­ance-sheet and then fo­cus on their core ac­tiv­ity of meet­ing the needs of the cor­po­rate sec­tor. The fi­nance min­istry and the Niti Ayog ( the erst­while Plan­ning Com­mis­sion) want the govern­ment to set up an ARC to take over the stressed as­sets of pub­lic sec­tor banks. The min­istry has called for a meet­ing of ex­perts, in­clud­ing of­fi­cials from the In­ter­na­tional Mon­e­tary Fund (IMF), later this month to dis­cuss the set­ting up of an ARC. Af­ter the 200809 global fi­nan­cial crises, many coun­tries set up such re­con­struc­tion com­pa­nies to bail out trou­bled banks. The US, for in­stance, set up the Trou­bled As­sets Re­lief Pro­gramme, to res­cue cor­po­rate gi­ants in­clud­ing Cit­i­group, AIG, Gen­eral Mo­tors and Chrysler.

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