Banks reporting lower NPA numbers: ICRA

Says 5/25 scheme helps them mask the extent, says stressed assets formation remains high; cautious on impact of plan to restructure power discom loans

Rating agency ICRA said on Monday it had lowered its projection of gross non-performing assets (NPAs) for 2015-16 in the banking system to 5-5.5 per cent from the earlier 5.3-5.9 per cent of the total.

It said banks could be masking the stress on their balance sheet by restructuring long-term loans as allowed by the Reserve Bank of India. The scheme in question, popularly known as ‘5/25’, allows banks to spread a project’s repayment obligation to a longer period, matching  the cash flow of the project, resetting the refinancing scheme every five or seven years. ICRA estimates roughly Rs 35,000 crore of loans have been restructured under the scheme. Many such projects would have otherwise shown up as NPAs.

Six banks of the State Bank of India group and 20 other nationalised banks showed moderation in the pace of stressed asset formation from around 5.6 per cent in 2014-15 to 3.3 per cent in the first half of 2015-16. However, including amounts restructured under 5/25, stressed assets formation remained high at 5.5-6 per cent in the first half of FY16, said ICRA in its performance update and outlook report on Indian banks.

Stressed advances, measured by fresh NPA generation, plus gross addition to standard restructured assets, remained largely unchanged at 10.7 per cent as of September, as against 10.6 per cent at end-March, when FY15 ended.

Effective implementation of the latest power distribution (discom) companies’ restructuring plan, UDAY, will reduce the vulnerability of banks’ exposure to the sector, ICRA said, though the reduced risk weight would lead to capital relief of only Rs 4,000-5,500 crore for the system. This would add only seven to 10 basis points (bps) to banks’ capital, which isn’t much, ICRA estimated.  

However, if all state governments participated, state owned banks’ profitability could fall by four to eight bps and net interest margin (NIM) by seven to 12 bps. One bps is a hundredth of a percentage point. NIM is the difference between yields on advances and cost of deposits, a key measure of profitability for banks.

In the scheme, loans to discoms will get converted into bonds with a lower coupon rate than the bank loans. This conversion will bring down credit growth to the extent of 1.7-2 per cent, ICRA estimated. Some public sector banks with higher exposure to discoms could see credit growth getting hit by seven to 10 per cent.

Central Bank of India, Punjab and Sind Bank, Vijaya Bank, Oriental Bank of Commerce and UCO Bank have the highest exposure to discoms.

However, it remains to be seen as to how many states accept this scheme.

While credit growth at private sector banks was 18.3 per cent over a year as on September, public sector banks (PSBs) could manage only 6.2 per cent growth. Interest rates in the bond market remained lower than banks’ base rate.

ICRA estimated banking sector credit growth at 11.5-12.5 per cent and deposits could grow at 11.5-13 per cent. In September, credit growth was 8.8 per cent. The growth in credit will be led by retail and agricultural loans, rather than by investment, said ICRA.

In this financial year, ICRA has downgraded credit ratings for three PSBs. The outlook for two others remains negative. Compared to that, private banks’ credit ratings are more stable, with their relatively stable performance, ICRA said.