Tamal Bandyopadhyay: Don't uncork the bubbly just yet

However, it is still not time to uncork the bubbly yet. The three-legged animal (NPAs) may soon be seen sniffing around and attacking some of the banks' books. In their over-aggressiveness in hunting assets, banks have been sowing seeds for new NPAs. The average NPA level in home loans is now around 4 per cent and the instances of defaults in credit card outstandings have been rising. Once, there is a slowdown in corporate earning growth, companies may not be in a position to clear banks' dues regularly. In which case, new NPAs will get generated.

Second, the momentum in credit growth cannot be sustained. In fact, the RBI has made it clear that the pace of credit growth must slow down. So, banks will not be able to bring down the percentage of NPAs by growing their advances aggressively.

Finally, banks will not have enough money to make provisions for NPAs. With the rising interest rates, their treasury income has taken a severe beating.

Most banks have, in fact, been making provisions to mark-to-market their government securities portfolio as bond prices are going below the level at which banks bought those securities. Banks have been trying hard to maintain their profitability by aggressively making recovery of past bad assets that have already been written off. Once the recovery process is complete and low levels of treasury income "" which will be the case in a rising interest rate regime "" banks will not have the cushion to make provisions for their bad assets.

So, going forward, the secular decline in the NPA level may see a reverse trend. Which is why, banks possibly need to enjoy a relatively higher net interest margin (NIM) for the time being. This will give them a handle to tackle the menace of the three-legged animal.