Rising bank NPAs: Should you be concerned?

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Q: What is your own estimate? Do you think the problems get worse in the next few quarters? When do you think you can see the gross NPLs falling off or fresh generation of bad loans tapering?

Bhowmick: Our study shows that restructuring loans at this period would be one of the more impactful on the banks asset reported asset quality numbers. We have started seeing that for some of the larger government banks where the percentage of restructured loans will be higher than 10% in some cases.

This issue would continue to rise and would probably peak around September. It would be sometime between September and December this year, where most of the restructure or a large part of the restructured loans would mature.

We have assumed upto 20% depending on the sectors that these restructured loans are in. Upto 20% of these restructured loans could potentially turn NPLs which means that the peak could probably be around the time which is around December 2010.

Q: Which are the sectors giving maximum trouble?

Bhowmick: Yes, restructure was maximum in infrastructure. The export, including textiles, leads. Of real estate, some concern specific companies have strengthen their balance sheet but the topline outlook is still uncertain.

Textile is probably a lot better but there is reason to be cautious. Autos have also improved. The overall scenario is a lot better. Therefore, we ourselves have tuned down some of the expectations that we had around this time last year. So between these sectors, they would probably be the most impactful. The story is still to unfold and probably be at least three quarters of that left.

Q: Would you agree that banking sector in general is likely to see some quarters where things would get a little tougher in the sense margins would come under pressure? You have a rising NPLs, a part of our capital will be deployed there and when NPLs rise typically banks also become a little wary of lending, do you see all that happening?

Kamath: In terms of lending, we have been talking a lot about the credit not picking up. The reasons are well known because money is available cheaper to the people from other sources. When the credit picks up in case there is some sector which is showing some signs of concentration of NPAs probably the bankers will be a little more careful. Otherwise a rise in NPA is sporadic or is not giving any indication to any sector. The bankers lending decisions will not get appreciated by that.

Q: Do you think there can be some danger to at least some small banks with couple of big accounts kind of going into default? Do you expect big damage in some small banks?

Kudva: Certain sectors have seen more challenges. The challenges are expected to continue. They have not gone away and these sectors include sectors like commercial real estate and some of the export oriented sectors like textile or gems and jewellery. We are continuing to see some signs of stress over there. I think the SME sector in general will take sometime before it can bounce back completely.

The good thing about the Indian banking system is that the portfolio today is much more diversified that it was at the time of the last downturn. Bear in mind that this time you have the whole retail asset book in the banking system which did not exist at the time of her last downturn in the late 90's.

So from a diversification perspective, you have a much more diversified banking asset portfolio today than you had 10 years ago. You do see signs of stress in some of these sectors but it is more sectoral rather than bank specific.

Q: Do you think margins as well as cost of capital several indicators of banks will be under some what more pressure than they were in the last two quarters, in FY11?

Bhowmick: As far as net interest margin is concerned, it will probably be at this level or even widen for the next couple of quarters as the impact of the lower re-pricing that happened and is happening at this point of time plays out. If one were to argue that because of the tightening in liquidity and possibly even on the policy rates, deposit rates at some stage would start rising and also as loan growth starts picking up.

As interest rates starts rising up, we will start seeing some impact on NIM. In FY11, NIMs would probably end up at the same level or marginally down maybe by five basis. The bigger impact on profitability is going to come from the credit cost for certain banks. The RBI's requirement for maintaining a higher provision levels is on the existing stock and an incremental basis. So credit cost could be the most impactful on profitability for banks in FY11.

Q: Would you say that FY11 and even the last quarter of FY10 would be a trifle more challenging for banks in terms of margins, cost of capital, cost of credit?

Kamath: If you ask a banker about the margins being under pressure, we will always agree with this question because every time the borrowers would like to borrow from us at the cheapest rate, the depositors would like to get better rates from us. Hence, the margins are always under pressure. We have been in a position to manage our asset liability management (ALM) in such a way that by meeting the expectations of the depositors and the borrowers, we maintain our margins in tact. Hence, it is a challenge for the bankers, which will be met.