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NPA management biggest challenge for banks in 2009

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After the global financial turmoil in 2008, Indian banks begin the new year with a lurking fear that their Non Performing Assets (NPA) would go up with their portfolios coming under severe stress.

There is already a visible strain on consumer, credit card and vehicle loan portfolios and many banks have taken conscious decision to scale down their advances to risky sectors. Some banks have also revised their credit growth targets downwards as the year has come to a close.

“The ongoing financial crisis has had its toll on export-related sectors like IT, textile and SMEs. This may indirectly impact banks’ asset quality. There is, therefore, a pressing need to ensure adequate risk-management mechanisms to overcome this challenge,” State-owned Bank of Baroda’s (BoB) Chairman and Managing Director M D Mallya said.

Indian banks witnessed a sharp jump in their gross NPAs for the first time in six years in FY08, compelling many of them to enhance their existing risk assessment tools.

Gross NPAs of commercial banks in FY08 escalated by Rs 6,136 crore, according to figures released by the Reserve Bank. Though there was no need to be unduly alarmed, banks need to follow certain standard parameters to ensure the quality of their lending portfolios, Mallya said. Similar view was echoed by ICICI Bank’s CEO-elect Chanda Kochhar who said the lender has taken a conscious decision “to follow certain parameters” to ensure asset quality.

Despite pressures emanating from global financial markets, Indian banks witnessed a healthy 25-29 per cent average growth in credit disbursals, primarily in housing, auto and infrastructure loans.

IndusInd Bank’s Head of Wholesale Banking Group, J Moses Harding supported this view saying that the present economic downturn has affected the repayment capacities of small firms, exerting pressure on the banks’ lending portfolios. “There is a pressure on SMEs as many of them are unable to repay their advances in the current scenario. This situation is likely to last in the short term. Banks need to adjust their risk management mechanisms to face the situation,” Harding said. Banks witnessed a huge credit demand from their corporate clients who found their foreign funding sources drying up in the aftermath of the global meltdown which originated with the subprime crisis in America in mid-2007.

The growth in credit in the industry in 2008 was in the range of 25-29 per cent on account of working capital requirements of small-, mid- and large-size industries, and the bankers expect an average 25 per cent rise in their credit in 2009. While state-owned banks were quick to respond to the recent signals from policy-makers by reducing interest rates periodically, many Private Sector Banks (PSB) are yet to follow the suit, mainly owing to pressure on their margins.

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