Banks step up disclosure as bad loans in the system increase

Bank aim to stem any backlash that may happen from the investor community in the light of increasing bad loans in the industry

Banks, particularly the private sector lenders in India, have decided to step up disclosure on non-performing assets (NPAs) in a bid to be more prudent and also stem any backlash from the investor community in the light of increasing bad loans in the industry.

For instance, for the first time Kotak Mahindra Bank and Dena Bank have given the quantum of loans that fall under SMA-2 (special mention accounts in which the principal or interest payment is due for 60 days).

While Kotak bank has loans worth Rs 153 crore that fall under SMA-2, Dena has loans of about Rs 8,000 crore in this list. Considering it is loans from this segment that are likely to slip into NPA, it provides a picture of the asset quality pressure that the bank may witness in the coming days.

On the other hand, Axis Bank and ICICI Bank have put out a watch-list of loans from various sectors that may slip into NPA, not a practice they followed earlier. While ICICI Bank expects increase in slippages from loans worth Rs 44,000 crore, Axis Bank has put Rs 22,600 of loans on a watch-list.

“We have also shared a new disclosure around a watch-list that the bank’s management assesses to be the key pool of potential future stress in the corporate lending book…The disclosures we have made today should help you all gain more insight into the health of our corporate loan book,” Axis Bank’s management said in an analysts’ conference call.

In fact, banks have learnt it the hard way. In the quarter ended September 2015, a day after the results, Axis Bank’s stock had tanked because details of impairments were not provided in the profit and loss account that is given on the exchanges. Instead, the bank had given a link in the auditor note which said that the details were mentioned on the bank’s website. This was viewed by analysts as a non-transparent measure which had ended up sparking worry about the health of the bank.

Uday Kotak, executive vice-chairman & managing director of Kotak Mahindra Bank, explained it was better for lenders to be upfront about the asset quality health of the bank rather than people accessing the data via Right to Information Act or other methods, which end up sparking panic among consumers and investors.

The overall asset quality of the banks in the industry has declined further. As a result, PSBs (that have reported results so far) gross NPAs have grown from Rs 1, 60,265 crore in FY15 to 1,98,318 crore at the end of FY16. In case of private banks in the same period, NPAs rose to Rs 47,943 crore from Rs 39,879 crore.