The unseasonal rainfall in March and hailstorms will wash away the agri-credit growth, believes India Ratings and Research (Ind-Ra). According to their report, the non-performing loan ratio of the agri-loan portfolio could double for some banks, though the reduction of overall return on asset may be muted between 4bp-6bp (about 10 percent of the profitability of government banks).
Speaking to CNBC-TV18, Prakash Agarwal, director - Banks & FI, India Ratings & Research said non-performing loans (NPLs) of some banks could double due to unseasonal rains. According to Indian Meteorological Department (IMD), the country is likely to experience weak monsoons this year.
Agarwal believes unseasonal rains may affect public sector banks’ asset quality. Punjab National Bank’s agri non-performing assets (NPAs) could increase by 6 percent, he added.
Below is the verbatim transcript of the interview:
Q: You have done some analysis where you believe the unseasonal rains in March will wash away the agri-credit growth. In fact you expect the agri NPLs to double for the banking space. Walk us through the key number and how these unseasonal rains will impact the NPA picture?
A: Due to unseasonal rains, March was the wettest month in the Indian industry in last 48 years and so, a lot of states have been badly impacted and therefore, banks that have higher presence in the impacted areas would be affected. Some of the banks’ NPL numbers could actually double from what the numbers were and so, though the agri-NPLs in FY14 was at about 13 percent and because of this rain could move to 17 percent by the end of FY15 while the numbers will get reflected only with a lag and so, by the second half of FY16 we will see this impact reflecting in the banks’ performance.
Q: What is the likely increase in NPLs?
A: As on FY14-end, the NPLs in agri segment were 14 percent for the system void so this number could reach to 17 percent because of this impact.
Q: By September?
A: It will get reflected in December, second half of FY16 but this impact will be a 4 percent increase in agri segment.
Q: What is the nature of the banks or the kind of banks that will be impacted?A: While the impact of rainfall has been widespread across India, the hail storm was mostly impacted in Northern India.
Q: Will it be private sector banks, will it be large public sector banks, small public sector banks, which kind of banks?
A: Mostly public sector banks. We have seen that mostly public sector banks like Punjab National Bank and Bank of Baroda have a higher presence in this. Also, ICICI Bank which has a significant presence in these areas could also be impacted because of this range.
Q: What about Andhra Bank and J&K Bank because Andhra Bank this quarter has reported a good improvement in their asset quality and has a very high exposure to the agri space? Have you done the numbers for individual banks and how can it be affected?
A: Andhra Banks’ NPLs in agri was about 20 percent and Latha said it has come down. A part of that could be because of the loan waiver which was announced in Telengana-a part of installments could have come and because the part of installment came, the entire agri-NPLs would have been classified as standard assets.
Therefore, we will wait for the management commentary but part of improvement in the NPLs could be because of that. Having said that, coming back to this range fall thing, Andhra Pradesh per se was not so much impacted because of this rainfall so while NPLs of Andhra Bank in agri remains high, the impact because of this rainfall is likely to be very limited. This bank is not the one that will be more impacted or disproportionately impacted because of this rainfall.
Q: Why not Allahabad Bank and banks like that? Why are you singling out BoB? I am asking because BoB relatively has fewer NPLs than other public sector banks.
A: But NPLs in agri-segment for that bank is about 15 percent and so, while overall NPLs could be somewhat lower compared to other PSUs agri-NPLs are high and because of their presence in the region the way the branches are spread in the states and we think that BoB could be one of the bank which could be higher impacted because of this rainfall.
For Allahabad Bank if you see the NPls to start with is about 16 percent. Their impact would be about 4 percentage points, that is what we expect so while the total NPLs in agri could be very high and still about 20 percent, the impact of this rainfall for Allahabad Bank may not be so high primarily because of their presence.
Q: You told us agri-NPAs could hit 17 percent by second half of FY16. Now there is a very high probability of monsoon being deficient even this year, that is what the early estimates indicate from MET so does that mean that this number of 17 percent is only going to increase if it happens?
A: Seems likely so. The 14 percent number itself was about FY14 and then FY15 rainfall was not very good, it was delayed as well as deficient so impact of that will get reflected and on the top of this unseasonal rain therefore, if the rainfall was to be weaker than what has been the long-term trend, certainly that could further aggravate the impact of agri-NPLs and that could have push on a northern side to the total NPL numbers of the banking sector.
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