Web Review: Are NPAs really bottoming out?

Though the central bank is not too worried about NPAs, rising gilt yields seem to be pointing to a structural problem in the economy

The Reserve Bank of India has hinted that non-performing assets (NPAs) of the banking system have almost bottomed out. In an interview with Mint, Anand Sinha, Reserve Bank of India’s deputy governor, has said that he expects NPAs should have bottomed out by now as world economies have shown signs of improvement. As far as India is concerned, he says that despite the potential upside risk, inflation has subsided now and there has been a rate cut, which can result in lesser NPAs.

However, Indian bond yields seem to paint a different picture. Despite the 50 basis points reduction in the repo rate announced by the central bank on April 17, 2012, yields, which were at 8.46 per cent fell to a low of 8.34 per cent on the news, but have again moved up to 8.69 per cent (see chart). This divergence perhaps seems to be pointing to the structural problem within the economy, which is fighting both inflation as well as liquidity.

In fact liquidity, measured through Liquidity Adjustment Facility, has once again moved from less than Rs 80,000 crore per day in the first half of April to between Rs 1.10-Rs 1.20 lakh crore.

Falling inflation, which prompted RBI to cut interest rates, has started to move up again. After four months of price decline, food prices in global markets have moved up by 8 per cent in April 2012. India’s consumer price index also moved higher to 8.22 per cent in March 2012 as compared to 6.62 per cent in February 2012.

Further, economic data coming in from the US has again started looking weak after a spell of inventory build-up. The UK has entered into a double-dip recession while Spain has just joined it by posting a shrinkage in economy of 0.3 per cent.

Recent numbers released by the corporate debt restructuring (CDR) cell shows that the loans referred for recast are at an all-time high. Loans for CDR have, in fact, jumped by 48 per cent over previous year to Rs 2,05,692 crore.

In December 2011 quarter, gross NPA of Indian banks were 2.9 per cent, which is likely to touch 3.5 per cent by December 2012. Commenting on the high NPA figure, Sinha said that NPAs are only a reflection of the stress in the Indian economy. Along with new accounts turning non-performing, a slowdown in recoveries from older ones is also contributing to the high number.

Sinha said he is not worried with the figures, but there’s a committee set up by the central bank to look into this issue. But the moot question is why is the 10-year yield rising after a 50 basis point interest rate cut? Only time will answer that.