Asset quality pressures to persist for two-three quarters sans recovery

Much of the burden would be seen on public sector banks as they have maximum share of vulnerable assets

Belying expectations of stability, asset quality pressures are expected to weigh on bank balance sheets for at least the next two quarters for want of sustained recovery in the Indian economy.

Bankers and analysts said though the pace of incremental slippages into non-performing asset (NPA) category might moderate, the credit costs are expected to stay high, as banks have to make provisions for old non-performing loans. Much of burden would be seen on public sector banks (PSBs), as they have the maximum share of vulnerable assets.

Union Bank of India Chairman and Managing Director Arun Tiwari said the asset quality has not stabilised. There is still pain in the system. Going forward, as the economy improves, pressures could subside, he said.

Seconding his views, Ashwani Kumar, chairman and managing director of Dena Bank said, “I don't think the worst is behind in terms of asset quality. The pain will continue for some more time. Whatever green shoots we have seen, they will take time to ultimately convert into cash flows.”

Besides, there are a few accounts which are stressed and it may slip into NPAs. The pain may continue for next two-three quarters from now and after that it will bottom out. September onwards things should start looking better. “The stressed assets which I have are linked to infrastructure,” the Dena Bank chief said.

According to rating agency ICRA, despite lower stressed asset formation, the banking systems’ Gross NPA increased from 3.9 per cent in March 2014 to 4.4 per cent in 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) reached an all-time high of 10.6 per cent as of March 2015.

The long spell of low economic growth has taken its toll on the Indian companies. They have accumulated a lot of debt on balance sheets with strained repayment capacity.

Ananda Bhoumik, senior director, India Ratings, said the debt level on corporate balance sheets is still high. The commodity prices are low which has adversely impacted the iron and steel sector. The asset quality will remain under pressure as many infrastructure accounts get restructured.

Betterment hinges on recovery

Bankers are pinning their hopes on a normal monsoon and cumulative effect of policy decisions giving push to economic growth.

N S Venkatesh, executive director and chief financial officer, IDBI Bank, said the improvement would be on the back of sentiments improving which will help cash flows, the Reserve Bank India’s accomodative stance in rates and government steps to boost the economy. “But for the time being cash flows may continue to be slow.”

The benefits from a turnaround in sentiment and actual pace of economic growth would accrue only over a period. This should translate into improvement in repayments and decline in stress levels.

Arundhati Bhattacharya, chairman, State Bank of India, said there was always a seasonality factor. “A lot of efforts go during the entire year. All these fructify in the last quarter. Whether it is other income or asset quality, there is always a seasonality factor. Notwithstanding this factor, overall, we are seeing stress coming down.”