Gross bad loans at commercial banks could increase to 8.5 per cent of total advances by March 2017, from 7.6 per cent in March 2016, according to a baseline scenario projection by the Reserve Bank of India (RBI) in its Financial Stability Report released on Tuesday. “The macro stress test suggests that under the baseline scenario, the gross NPA may rise to 8.5 per cent by March 2017,” the RBI noted in the report. “If the macro situation deteriorates in the future, the gross NPA ratio may increase further to 9.3 per cent by March 2017.”
Asset Quality Review
The central bank has been pushing lenders to review the classification of loans given by them as part of an Asset Quality Review (AQR). The resultant sharp surge in provisions for bad debts has eroded profitability, especially at state-owned banks, in recent quarters. The gross bad loans of public sector banks increased to 9.6 per cent as of March 2016, from about 6 per cent a year earlier, RBI data showed.
There was an almost 80 per cent jump in gross bad loans in 2015-16, according to the report. Gross bad loans of Indian banks widened to 7.6 per cent from 5.1 per cent in September and from 4.6 per cent in March 2015. In 2004, gross bad loans in the Indian banking sector touched 7.8 per cent, while the ratio was 11.1 per cent in 2002. “The stress in the banking sector, which mirrors the stress in the corporate sector, has to be dealt with in order to revive credit growth,” RBI Governor Raghuram Rajan said in the report.
The rise in gross NPA is mainly because of the AQR, RBI said in the report. The AQR conducted by the banking regulator found several restructured advances, which were standard in the banks’ books, that needed to be reclassified as non-performing.
Since a large proportion of standard restructured advances slipped into the NPA category, the overall stressed assets ratio increased marginally to 11.5 per cent from 11.3 per cent in September.
RBI said subsequent to the AQR, gross NPAs rose 79.7 per cent year-on-year in March 2016.
Private sector banks
The net NPA of the banks also increased sharply to 4.6 per cent in March 2016, from 2.8 per cent in September 2015. Public sector banks’ net NPA was 6.1 per cent, while the ratio for private sector banks was 4.6 per cent.
On the business side, the report noted that credit and deposit growth remained in single digits for the previous financial year. While credit growth was 8.8 per cent, deposit growth was 8.1 per cent.
There was a stark difference in the credit and deposit growth of public sector banks as compared with their private sector counterparts. According to RBI data, for public sector banks, loans grew at 4 per cent while it was 24.6 per cent for private banks. Deposits of state-run banks grew by 5.2 per cent, while for private banks it was 17.3 per cent.
“The relative performance of bank groups reflect their respective strengths amidst on-going industry-wise balance sheet repair and also sluggish growth in private capex,” according to the report.
The only silver lining is the housing sector, according to the financial stability report, which said with gross NPAs of the retail housing segment at 1.3 per cent, it does not pose any significant systemic risks in the Indian context.