Bad loans could worsen gross NPAs of banks to 9.3% by 2016-17

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Foreseeing worsening situation of bad loans in the country, Reserve Bank said on Tuesday the gross non- performing assets of the banks can rise to as high as 9.3% in 2016-17 after hitting 7.6% in March 2016. Banks’ gross NPA had stood at 5.1% in September 2015, a report released by RBI said.

“Gross NPAs of banks’ sharply increased to 7.6% of gross advances from 5.1% between September 2015 and March 2016 after asset quality review,” according to the Financial Stability Report (FSR) released by RBI. Net non-performing advances as a percentage of the total net advances increased to 4.6% in March 2016 from 2.8% in September 2015.

The report said macro stress tests suggest that under the baseline scenario, the GNPA ratio of banks may rise to 8.5% by March 2017 from 7.6% in March this year. “If the macro scenarios deteriorate in the future, the GNPA ratio may further increase to 9.3% by March 2017 under at severe stress scenario,” the report said.

RBI conducted asset quality review (AQR) during the second half of 2015-16 and it covered 36 banks (including all PSBs), which accounted for 93% of the banks’ gross advances. The sample reviewed in AQR constituted over 80% of the total credit outstanding and 5% of the number of accounts of the banking system reported through CRILC. The main objective of AQR was to examine the assessment of asset quality at the bank level and at the system level as a whole and to uniformly deal with cases of divergence in identifying NPAs and additional provisioning across banks.

RBI said among the banks, PSBs may continue to register highest GNPA ratio. Under the baseline scenario, PSBs GNPA ratio may go up to 10.1% by March from 9.6% as of March 2016. However, under a severe stress scenario, it may increase to 11% by March 2017. The report said the GNPA ratio of private sector banks, under the baseline scenario, may rise to 3.1% by March 2017 from 2.7% as of March 2016, which could further increase to 4.2% under a severe stress scenario.

The report further said there was a sharp reduction in restructured standard standard advances ratio to 3.9% in March from 6.2% in September.

PSBs continued to hold the highest level of stressed advances ratio at 14.5%, whereas, both private sector and foreign banks, recorded stressed advances ratio at 4.5%. Amongst the major sectors, industrial showed a decline in the stressed advances ratio from 19.9% to 19.4% between September 2015 and March 2016, though the GNPA ratio of the sector increased sharply to 11.9% from 7.3%.

Among the major sub-sectors within industrial sector, basic metal and metal products accounted for the highest stressed advances ratio as of March followed by construction and textiles. The stressed advances ratio of the infrastructure sector declined to 16.7% from 21.8% between September 2015 and March 2016.

FSR further said share of large borrowers’ in total loans increased from 56.8% to 58% between September 2015 and March 2016. Their share in GNPAs also increased from 83.4% to 86.4% during the same period. The GNPA ratio of large borrowers increased sharply from 7% to 10.6% during September 2015 to March 2016 and the increase was evident across all bank groups. In this respect, PSBs recorded the highest GNPA ratio at 12.9%.

The report said both return on assets (RoA) and return on equity (RoE) of banks’ declined sharply to 0.4% and 4.8%, respectively, in March 2016 from 0.8% and 9.3% in March 2015.

Profit after tax (PAT) declined by 43% during the financial year 2015-16, due to sharp increase in risk provisions and write-off, the report said. It said overall credit and deposit growth of banks’ remained in single digits because of subdued performance of PSBs.

Credit growth of all banks’, on a y-o-y basis, declined to 8.8% in March 2016 from 9.4% in September 2015 while the growth in deposit declined to 8.1% from 9.9%. The relative performance of bank groups reflects their respective strengths amidst on-going industry-wide balance sheet repair and also sluggish growth in private capex, the report said.