Industry loan book turns worse

GROSS NON-PERFORMING ASSETS (GNPAs) of scheduled commercial banks rose to a staggering 11.6 per cent at the end of March 2018, up from 10.2 per cent in September 2017 (Chart 1), noted the Reserve Bank of India (RBI) in its latest Financial Stability Report. In a business as usual scenario, the RBI expects bad loans to rise to 12.2 per cent by March 2019.

However, it warns that if macroeconomic conditions were to deteriorate, GNPAs of public sector banks may well touch 17.3 per cent by March 2019. However, the data presented in the report suggests there is reason to be optimistic. First, as shown in Chart 2, the pace at which fresh NPAs have been recognised has been steadily falling across all banks. Second, the ratio of restructured assets to total advances has come down over the past few years. As shown in Chart 3, it now stands at 0.9 per cent in March 2018.

Third, as shown in Chart 4, there has been a sharp decline in loans in the special mention accounts (SMA-2) category as percentage of gross advances, which suggests that the stress in the system is now largely recognised. Fourth, the share of large borrowers in total bank advances has declined from 56 per cent in March 2017 to 54.8 per cent in March 2018 as seen in Chart 5. Fifth, as shown in Chart 6, net non-performing assets have grown at a slow pace as compared to the rise in GNPAs. This suggests a sharp increase in provisioning for bad loans by banks.

On the flip side, banks continued to see a sharp deterioration in their industry loan book. As shown in Chart 7, 22.8 per cent of loans to industry turned bad in FY18, up from 19.4 per cent previously, which suggests that headline GNPA numbers are being dragged down by lower defaults in priority sector lending.