Bad loan recovery by banks only gets worse in four years

Fall in recovery through SARFAESI channel, note ban negative factors in 2016; iron & steel, construction, power, telecom and transport face high leverage and interest burden

NON-PERFORMING ASSETS

AT A time when bad loans are witnessing a surge, the rate of recovery of bad assets by banks has taken a knock. The rate of recovery of non-performing assets (NPAS) was 10.3 per cent, or Rs 22,800 crore, out of the total NPAS of Rs 221,400 crore during fiscal ended March 2016, against Rs 30,800 crore (12.4 per cent) of the total amount of Rs 248,200 crore reported in March 2015, data from the Reserve Bank of India (RBI) has said.

According to the RBI, the rate of recovery was 18.4 per cent, or Rs 32,000 crore out of the total NPAS of Rs 173,800 crore reported in March 2014. The recovery rate was even higher at 22 per cent (Rs 23,300 crore) in March 2013 out of the total reported NPAS of Rs 105,700 crore, the RBI said in its database on the Indian economy.

The RBI said a total of 46.54 lakh cases to recover NPAS were filed in Lok Adalats, debt recovery tribunals and under the SARFAESI Act. Of this, 44.56 lakh cases were taken up by Lok Adalats during fiscal March 2016.

Public sector banks, which are burdened with a high proportion of the banking sector’s NPAS, could recover only Rs 19,757 crore as against Rs 27,849 crore during the previous year, the RBI said. "The deceleration in recovery was mainly due to a reduction in recovery through the SARFAESI channel by 52 per cent from Rs 25,600 crore in 2014-15 to Rs 13,179 crore in 2015- 16. On the other hand, recovery through Lok Adalats and DRTS increased," the RBI said in its Report on Trends and Progress in Banking.

Banks’ gross NPAS (GNPAS) jumped to 7.6 percentoftotaladvancesbymarch2016,from 5.1 per cent in September 2015. Including restructuredstandardadvances,overallstressed loans rose marginally to 11.5 per cent in March 2016 as against 11.3 per cent six months ago. "The stress is the highest in the industrial sector. Other stress tests conducted by the central bank suggest further pain in store, with baselineprojectionpointingtognpaof8.5percent by March 2017, which could worsen the ratio to 9.3 per cent in a severe stress scenario," said Radhika Rao, Economist, DBS Bank.

NPAS have almost doubled in the last 15 months. From Rs 3,40,556 crore in September 2015, bad loans have risen to Rs 6,68,825 crore in September 2016, largely due to the classification requirement of the RBI. Demonetisation is likely to stall the recovery process further in the coming two quarters, banking sources said.

Though the government and the RBI have recently announced sops, including higher working capital limit, cash credit limit and credit guarantee for small units, small units are finding the going tough amid the cash crunch and curbs on withdrawal of money from bank accounts. "Demonetisation can put pressure on NPAS especially for SMES whose turnover has been affected amid fixed interest costs. This needs to be monitored closely by banks," Care Ratings said.

Analysts said NPAS have appeared to be stabilising in terms of incremental assets. "The lower performance of banks is more due to the extra provisioning that they have done to clean up their balance sheets. As the economy recovers, the NPA levels will come down. We believe that the system has better recognition norms today which is comforting. However, the provisioning of the same could take two quarters and hopefully by March things should be better," Care Ratings said.

While overall corporate sector stability has improved in FY16 compared to 2007-08, the profile of stressed industries suggests that the deleveraging process is not on account of a turnaround in demand, improved liquidity or lower credit costs. Iron and steel industry faces highest leverage and interest burden as of March 2016. This is followed by construction, power, telecom and transport industries. "Hence, instead of an improved business environment translating into better corporate earnings, leveraged firms continue to hive off their non-core businesses or are in midst of a debt restructuring exercise with its banks (debt converted to equity). Reports pegged planned asset sales by top ten indebted business houses in the economy at Rs 83,000 crore since April 2015, but demand has been lukewarm," Rao said.

Rating agencies have voiced concern over public sector banks’ capital needs and inadequacy of funding options. Moody’s expects asset quality to be under pressure over next year. Despite government’s plans to increase capital infusions into banks, Fitch cautioned that more injections were required to support banks’ credit needs, while the latter also manages pressures of asset quality, resolution of problem loans and elevated credit costs.

Banks are now pinning their hopes on the Insolvency and Bankruptcy Code, 2016 for effective loan recovery. "Effective implementation of the Insolvency and Bankruptcy Code can potentially release about Rs 25,000 crore capital currently locked up in non-performing assets over next 4-5 years, said a Crisil-assocham joint study. "If implemented successfully, the code will help India’s banking sector catch up with or even exceed the recovery rates of 32 per cent and average time taken of 2.8 years in other emerging markets."

The code will also contain slippages into NPAS by spawning better credit discipline. The RBI has already tightened norms for wilful defaulters, which, together with implementation of the code, will enhance recoveries from such borrowers and improve overall credit discipline, Crisil said. However, considering that institutionalising the code will be a long-drawn affair, it may not provide any material capital relief to banks over short term.

Illustration: C R Sasikumar