Bad loans will continue to plague banks: CRISIL

About 40% of restructured assets have turned NPAs, says CRISIL

Gross non-performing assets (NPAs) of Indian banks are likely to rise by Rs 60,000 crore to Rs 4 lakh crore in the current financial year, a report by rating agency CRISIL says. As proportion of assets, gross NPAs will increase by 20 basis points (bps) to 4.5 per cent, the report added.

“Bad loans are seen rising because of withdrawal of regulatory forbearance on restructuring, and high slippages from restructured assets. About 40 per cent of assets restructured between 2011-14 have degenerated to NPAs,” the report said.

Weak assets are expected to stay high at six per cent (Rs 5.3 lakh crore), the report said. CRISIL defines weak assets as reported gross NPA, plus 35 per cent of restructured advances (excluding state power utilities), plus 75 per cent of investment in security receipts, plus 15 per cent of loans structured under the 5/25 scheme.



While the 5/25 scheme will enable lower slippages from large exposures, it can partially mask asset-quality pressures as reported NPAs might not be a true reflection of the extent of stress in  banks, said Pawan Agrawal, chief analytical officer, CRISIL Ratings.

According to the 5/25 scheme, banks can restructure or refinance project loans worth over Rs 500 crore. So, a loan of 25 years can be refinanced after a period of say five years, with revised pricing terms.

CRISIL’s calculations show Rs 80,000 crore of stressed loans could be structured under the 5/25 scheme during 2015-16.

PSBs to outperform

Given all this, banking sector profitability will remain weak with return on assets (RoA) staying flat at 0.8 per cent in the current financial year. Private sector banks will continue to outperform the industry with RoA of 1.6 per cent compared with 0.5 per cent for public sector banks (PSBs), the report said.

Given that the government will provide additional capital to only those PSBs which meet the performance criteria, PSBs would now have to fend for themselves for raising capital. On the other hand, given the slowdown in growth of PSBs, the requirement of capital itself will be reduced. To meet Basel-III regulations, banks needed to raise Rs 4.7 lakh crore till March 31, 2019, of which Rs 1 lakh crore has been raised so far. But due to the slowdown, the capital requirement has reduced by Rs 30,000 crore, CRISIL said. This would, however, be replaced by higher requirements by private banks given their faster pace of growth. In all, PSBs will now have to raise Rs 2.6 lakh crore and private banks Rs 1.1 lakh crore up to March 2019.

Rajat Bahl, director, CRISIL Ratings said, “Generation of capital won’t be easy for PSBs given their muted profitability and difficulty in diluting government’s stake because of poor valuations. Also investor appetite for non-equity Tier-I instruments is yet to be fully tested. Consequently, we expect PSBs to grow at half the pace of private banks for the next four years.”