Asset quality pressures to continue for a few more quarters

Loan recasts and refinancing mask stress in asset quality

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After gleaning through the first quarter results of some banks, the Reserve Bank of India has signalled that stability might be returning to asset quality. However, with high risks of slippages from restructured loans and refinanced accounts, the pressures might not ease for public sector lenders till a few more quarters.

Some banks such as Bank of Baroda and Punjab National Bank reported the moderation in slippages in the first quarter. But the risk of stressed accounts, which have been refinanced, becoming bad loans remains high. There is a question mark over the capability to service interest, according to senior public sector bank executives and analysts.

In the last week of July, Reserve Bank of India (RBI) deputy governor S S Mundra had said there was some improvement in banks’ non-performing assets (NPAs), in light of the April-June quarter numbers. There is some stability in the NPA levels. This conveys only one part of the story.

According to data from Corporate Debt Restructuring (CDR) Forum, out of 16 companies that exited from CDR in April-June period, 13 accounts (loans worth Rs 10,672 crore) went out due to the failure of CDR package. They are now bad loans on the books of banks. Only three cases (for loans worth Rs 1,707 crore) existed due to effective implementation of CDR packages. There were 263 live CDR cases involving exposures worth Rs 2,74,026 crore at the end of June.

The gross non-performing loans of the scheduled commercial banks stood at 4.45 per cent in March 2015, up from 4.11 per cent in March 2014. The stressed assets (gross NPAs plus standard restructured loans) stood at 10.88 per cent in March 2015, up from 9.98 per cent a year ago, according to finance ministry data.

Ajay Srinivasan, director, CRISIL Research, said the pace of increase in gross non-performing loans might come down in the coming quarters. However, there is another area to watch for - restructured loans and refinancing under 5*25 scheme. It is going to mask the growth in NPAs. “Nothing has materially changed in sectors, like power and steel, which have been source of stress for banks”, he added.

As a step to salvage books, banks are engaged in refinancing stressed units in infrastructure and core sector through arrangements such as the 5*25 scheme.

According to an IDBI Bank executive involved with corporate lending, while banks are giving a fresh lease of life to companies, the package for steel units hinges on the revival in demand. A case in point is that of Bhushan Steel, where there are doubts over the firm’s capability for interest payment on extra loans.

Sharing his skepticism, R S Rawat, executive director of Canara Bank, said the high-value slippage has been contained at his bank, but still there are pressures in the infrastructure and iron & steel sectors. The situation would improve only when economic and industrial upturn is visible, Rawat added.

According to Srinivasan, it will take at least a year to see any improvement in asset quality situation on the back of economic revival.