With the economic outlook worse than expected, experts say the pressures on banks are not likely to ease soon.
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.
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