NPAs to haunt banks for a long time

Emkay expects gross NPA growth to average around 40% in next few years

Aggressive lending to the agriculture sector and exposure to high sector has led to a high ratio of Non-performing assets (NPA) among banks, according to a report by Emkay research.

“Overall, we believe the peak of the NPA cycle for the Indian banking sector is still some time away. We expect gross NPA growth to average around 40% in the coming couple of years compared to the 30% seen during financial year 2009 to financial year 2012. This is due to a combination of factors including agricultural lending and industrial credit,” said Dhananjay Sinha, co-head institutional research, economist and strategist at Emkay Global Financial Services.

 

The Emkay research report did not rule out gross NPA ratio rising from the 3.1% in FY12 to 4-6.5% in the next 12-24 months. It attributed it to factors like dominance of long-term lending rates and exposure to high risk sectors.

Rising NPA have also reflected a weakening in macro conditions. “The linkage of the macro economic conditions to the elevated leveraging in the banking system is embodied in multiple variables including decline in domestic saving rate (public, household and private), impairment of productivity growth due to persistently high inflation, commodity prices & revenue deficit and decline potential GDP growth,” the report said.

Emkay is not the only firm to express these concerns. Motilal Oswal Financial Services recently released a report which said that higher stress on asset quality led to sharp increase in gross NPAs and net NPAs for most state-owned banks. The report had mentioned that the agriculture segment remains a high stress area for state-owned banks.

It had said that gross NPAs in the agriculture segment increased across banks, with the sharpest increase seen for Union Bank and State Bank of India. Earlier this year, the new chairman and managing director of Union Bank of India, D Sarkar had said that with economic slowdown pushing up the tally of bad loans, the bank would focus on improving the management of NPAs and bolster financial profile.
 
The Emkay report said that the deleveraging process and the NPA cycle can be prolonged due to reasons like high commodity prices, weakening in fiscal conditions due to extension of populist entitlement programs. However, it said that factors like aggressive policy measures towards fiscal consolidation and achievement of threshold inflation of around 5% and correction in global commodity prices would shorten the NPA cycle.