For banks, the past few years have been a struggle. A slowing economy has increased worries for the financial sector in the country, with the main concern being the number of bad assets.
First quarter numbers for FY13 for banks indicate the stark difference in asset quality between public sector banks and private banks. Apart from corporate loans going bad, PSBs have the additional burden of the micro, small, and medium enterprises, which weighs heavily on their accounts.
Furthermore, this year another factor has aided fuel to the fire. The monsoon situation in the country has everyone worrying about the state of the economy. Speaking to CNBC-TV18, Ananda Bhoumik of Fitch Ratings says that banks will see further stress because of the weak monsoon. “With the monsoon situation obviously worse than expected, I think pressures in consumption would continue together with inflation,” he said. He further adds that non-performing loans for this year could be as high as 4.2%.
SS Mundra, ED of Union Bank, is also on the same page. He agrees that NPA situation in the country has seen a steady uptick. However, he believes a more appropriate idea of the NPA condition can be seen if the banks used another method. “The right thing would be to take the figure of gross NPA, take 15% of the restructured asset as probable NPA, and add to it the stock of return of loans. Put it together and then look it as a percentage of the gross advance book. Probably that gives a much better clarity than what we think,” he said.
With the outlook worse than expected, experts say the pressures on banks are not likely to ease soon.
Below is an edited transcript of their interview with Latha Venkatesh and Ekta Batra. Also watch the accompanying video.
Q: What you made in terms of trends post the Q1 numbers, especially in terms of PSU banks as well as private banks on the asset quality front, especially the divergence? Is the gap increasing quite significantly and what do you think the trend would be going forward?
Bhoumik: I think the trend on the macro pressures is quite clear and they would likely continue for at least another couple of quarters. With the monsoon situation obviously worse than expected, I think pressures in consumption would continue together with inflation. In the first quarter for example, we have seen gross NPLs by and large increasing on an average at about 20-30 basis points. That may just continue for the next couple of quarters. Our year end forecast for gross NPLs for the system was at around 3.75%, but I think we will up that to at least 4%, if not 4.2%.
In terms of the divergence between government banks and private banks, it is very interesting. Government banks obviously are facing a lot of pressure on the MSME side where necessarily the private banks aren’t really prominent. Their case has been mostly on the consumer side so far, where pressures have been far better this time. But I would still be cautious because on some of the consumers where growth has been quite rapid, especially on the unsecured loans against properties we are clearly seeing a dream run there. Let’s hope that that continues for sometime and doesn’t just collapse.
Q: If you add the restructured assets to the net NPLs, as a percentage of the net worth, it actually wipes out the whole net worth for several banks including yours. These are beginning to look scary don’t they?
Mundra: Number one, if you look at the trend of gross NPA, March 11th the gross NPA in system was 2.4%. In September 11 it came to 2.8%, which reflected a sharp increase. But from September ’11 to March ‘12, the gross NPA in the system increased by 10 basis points, so it became 2.9 bps. The point is that the first half of previous year and largely with the migration to the system, I think that is where the sharp uptick came. After that there is a consistency uptrend.
Secondly, always the point comes about the public sector banks and private banks. But I have a very clear view on this that besides being a commercial entity, banks certainly have a role to play in the national economy. This is not in the context of India only. Globally also that fact is being recognized today. In some European countries banks didn’t perform this role, and I think today we can see what is happening to the economies of those countries.
The point I am trying to make is that post 2008, when the banks came forward, the performance by bans was lauded by the world at large. I think that has resulted into safeguarding the productive sector for the economy. Otherwise, the situation would have been entirely different; probably the pains would have been much larger.
Now whatever has happened there, some reflection has to come which is seen today. I think the problem with our view point is it is too fixated on a quarter to quarter basis; we are missing the large picture. So I think we have to see in that perspective.
As far as the figures which you have mentioned, I think they are starting with one basic premise that the entire restructured loan book is an NPA. If we take that premise, then probably whatever figures you are mentioning is perfectly right. But I won't agree with that. I strongly disagree with it because even if you look at the first phase of major restructuring, which came after 2008, it was expected that 15% of this may eventually slip into NPA. But even if I looked at the figures today, the slippage is around 11-12%. So the entire restructuring tantamount to becoming NPA is not the right thing.
I think even in RBI’s latest stability report, the parameter which RBI has used is around 15% impairment coming out of the restructured book. From that perspective, I agree with you that we have to look into the stress and the system and individual entity. Probably in my mind the right thing would be to take the figure of gross NPA, take 15% of the restructured asset as probable NPA, and add to it the stock of return of loans. Put it together and then look it as a percentage of the gross advance book. Probably that gives a much better clarity than what we think.
Q: What would be that number for you and how would you compare it with the previous quarter?
Mundra: Since I won’t know the number of others, so I can’t compare it. That being the case, I think to discuss my figure in isolation would not have much meaning. Finally, when we are talking about the coverage of the NPA - I think we have to also keep in mind that if there is an uncovered portion then what kind of collaterals are available. So, again to believe that the entire uncovered portion is wiping out the capital is probably taking it to the other extreme.
Q: How do you think rating agencies will look at this? Will they want more capital to be beefed up for banks? We know that an SEB restructuring plan is in the works and that’s a massive one. Do you think that to convince investors and agencies who rate the system, a little more capital at least will have to be brought in? How do you see them reacting?
Bhoumik: It’s a very interesting point, especially the point that Mr. Mundra mentioned about the strategy that government banks follow. The way we look at it is we focus on potential stresses. Ratings are meant to be forward looking. We try and see what sort of cover individual banks have. Whether it would be by way of their profits or by way of general provisions and ultimately capital.
One of the comfort of course that we take even under fairly extreme stresses is that while these stresses may have come up in government banks because of the strategy but ultimately the government of course has committed to make sure that they have adequate capital. We know that under Basel III there is fairly significant amount of capital that the government is actually required to put in between FY16 and FY18. That in our view provides a certain flow.
So, therefore the move that irrespective of the performance of government banks which obviously are currently under stress for cyclical reasons, from a rating perspective there is reason to believe that there is certain floor and certain safety which is available because of the regulations and because of government’s involvement as a shareholder.
For example you mentioned ACB, it’s just the bank is doing that negotiations themselves, they also have the ministry on their side. These are obviously assets of national importance. So, some of those points are I think valid which gives us some amount of comfort.
Q: What about incremental lending? How strict are you in terms of exposure to a certain amount sectors in terms of incremental lending going forward? Which would these sectors be and how exactly do you think it will possibly affect your overall credit growth?
Mundra: I would like to briefly go back to the earlier point. I was not speaking from the high moral ground when I am talking about the nation building. The point I was trying to make that the banking system cannot be decoupled with the reality in the national economy and there are evidences as I mentioned in the Europe that if banks are becoming totally alienated from that and looking for safe haven, ultimately it bounces back.
The point I was trying to make that if we slightly look at the medium to long term and clearly not focus on very quarter to quarter kind of thing, I think this is a right strategy. Mr. Ananda also recently mentioned. So that is the point I am trying to make that it may look painful in the quarter which has gone or the quarter which is on. But going forward it is going to be a right strategy. I have a firm belief in it.
Second, as far as the wiping of the capital and the scary situation, let me tell you, if you look at the Indian context the ratio of NPA to the capital, I think it is better than what it is prevailing in UK, USA, Japan, Spain, Italy and a host of other countries. You can find these figures in the RBIs stability report. These are the two points I wanted to make.
Coming to your question, yes restructuring book, there are cases and as we look at things, maybe in current quarter or coming quarter there would be cases which keep on coming for restructuring. But yes if a banker is not learning from the past I think then he is not true to his profession.
Surely we have taken the right lessons from all the past cases, all the past instances. To that extent the due diligence process, the other parameters, the sectors where we would like to have incremental exposure and the sectors where we would not like to have exposure, I think for last 1.5 years, with lot of focus we have been working in that direction.
Q: Do you think that we are going to see additional restructured assets and NPLs in the coming quarters? According to you where might the system find the peaking of both these categories of assets?
Mundra: I think again two questions. As far as the GDP growth is concerned, I would not like to comment on the figures. I am not so qualified eminent economist and analyst. I think they have given their projection and I would like to stand in middle of them. So, that is it.
As far as restructuring of NPA is concerned as I mentioned looking to the overall condition now this is the process. When you are doing banking, you are doing business - it would never be so that in any quarters there is no fresh NPA or no fresh restructuring or slippage.
But the point is that if your recovery, if your upgradation is also equally strong and you have a good profitability then the end result is something which is quite manageable.
Q: What is the figure you would work with if at all in terms of the worst possible case, 4%? Where do you see it ending?
Bhoumik: We are relooking at these numbers virtually every month. We started by having a forecast of 3.75% gross NPL expectation reported for March 13 - that was beginning of this year. Now we are already up to 4-4.2%. We are going to really figure out to see when is all this going to bounce back. This is clearly the longest and the deepest slowdown we have seen in 10 years. So, we probably still have some more pain to go.