Agri NPAs might add to banks' asset quality woes

The credit offtake remains tepid. Loans grew by 10.2% year-on-year till May 15, against 13.2% in the year-ago period, according to RBI data

Asset quality concerns would remain a headache for most banks in the first quarter ending June 2015. Besides the over-leverage and payment delays pushing companies to default, the adverse effect of unseasonal rains and hailstorms on farm loans will add to the pressure on bank balance sheets.

There could be some solace, though, for big-ticket loans to companies including those from infrastructure and core industries. The Reserve Bank of India has allowed banks to restructure loans for which proposals were received by March 31, 2015. It might reduce pressure for provisions in the near term.

Sushil Muhnot, chairman and managing director of Bank of Maharashtra, said the unseasonal rains and hailstorms (in March and April 2015) have hit agriculture and farmers. While loans to farmers in affected regions will be rescheduled, the non-performing assets (NPAs) in farming and allied sector are expected to go up.

State Bank of India (SBI) executives said the issue is definitely serious. What complicates matter is local political elements advising to “not to pay” to those who have capacity to pay on promise of debt wavier. SBI's agriculture NPAs were Rs 10,652 crore at the end of March 2015.

The issue of adverse effect of rains in March and April on agriculture and asset quality is expected to figure prominently at the meeting to be held by Union finance Minister Arun Jaitley with the heads of public sector banks and financial institutions on June 12, 2015 in New Delhi.

Besides, steps for immediate relief and long-term measures such as revamping crop insurance would be discussed at meeting, said public sector bank executives.

According to rating agency ICRA, despite lower stressed asset formation, the banking system’s gross NPAs (GNPAs) increased from 3.9 per cent as on March 2014 to 4.4 per cent as on March 2015. They are likely to increase further with the end of the regulatory forbearance on restructured assets. Stressed assets outstanding (gross NPAs plus standard restructured advances) reach an all-time high of 10.6 per cent as of March 2015, it said.

Credit cost — the amounts banks have to set aside as provision for bad loans and restructured assets - are likely to remain at elevated levels in the first quarter. The tepid growth in credit means earning from interest income would remain weak while obligations remain high.

“Apart from asset quality concerns, even the pressure on provisioning is going to continue in this quarter and at least for a couple of more quarters. That is on account of higher slippages that had happened in the last quarter. As a result, banks will have to continue to provision for more. In the same time, any meaningful recovery or upgrade will take time. Any significant improvement in asset quality for the system will take another two-three months,” said a senior executive with a public sector bank.



The credit offtake remains tepid. Loans grew by 10.2 per cent year-on-year till May 15, 2015 against 13.2 per cent in the year-ago period, according to Reserve Bank of India data.

“Asset quality pressure is likely to continue and recovery will continue to remain tepid. That is because we haven't seen any credit expansion happening. On the other hand, the optimism amongst corporates is not strong,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services.

“When there is no confidence of capital expenditure improving and revenue and profitability of companies remaining under pressure, then the chances of seeing an improvement in asset quality are not very likely,” he added.