Banks face bad debt pressure

The banking system has seen a steady improvement in asset quality in recent years and gross NPAs have fallen substantially. However, the loan restructuring across the system and the seasoning of new loans could indicate that the actual level of bad loans (NPAs) could be higher.

The results of many rated banks for 2007-08 showed rising NPA levels. The decline in asset quality may put pressure on their profitability and solvency positions, Moody's said in its report on the Indian banking sector.

 

The agency welcomed the trend of declining NPAs, as this showed that the accretion of fresh NPLs had been minimised.

"We view this improvement with cautious optimism due to the extensive restructuring carried out in recent years across the system. This could indicate that the actual level of NPLs may be higher", it added.

Further, based on recent data and results of 2007-08, the declining trend appears to have reversed and the absolute bad loans have increased.

The seasoning of relatively new retail lending, combined with the higher interest rate environment, have led to increased delinquency rates, especially for retail loans.

Indian commercial banks State Bank of India and ICICI Bank registered 28.4 per cent and 83.7 per cent rise in absolute gross NPLs in FY08. Yet, the relative gross NPLs to gross loans remains at acceptable levels: 3.04 per cent in 2008 from 2.92 per cent at end of March 2007 for SBI and 3.3 per cent from 2.08 per cent in case of ICICI.

The lower increase in retail loans is responsible for the slowdown in the overall growth loan in 2007-08.

Retail loans need to be fully tested in a negative credit cycle. Some banks do not have the comprehensive credit scoring and monitoring systems and tools in place for closely screening retail loans.