Bad Loans Soar To Rs 7.7 Lakh Crore In FY17
Axis Bank and Yes Bank have seen the steepest increase in absolute gross NPAs due to the RBI’s asset quality review.
Banks continued to dig through the depths of their loan books in financial year 2016-17, searching for sins of lending past. What emerged at the end of the year was a still growing stack of bad loans and the realisation that private banks were as much at fault for hiding stressed debt as their state-owned counterparts.
Most banks have now reported their fourth quarter earnings, with the exception of City Union Bank. State Bank of India (SBI) has reported both standalone earnings and consolidated numbers after merging with its five associate banks. Individual earnings for the associate banks have not been released.
The reported numbers show that gross non-performing assets (NPAs) across listed banks, including the consolidated bad loans declared by SBI, stood at Rs 7.7 lakh crore at the end of March 2017.
If you exclude the SBI associates for purposes of comparison, gross NPAs stood at Rs 7.11 lakh crore at the end of FY17, compared to Rs 5.70 lakh crore at the fiscal 2016. That’s an increase of about 25 percent in aggregate terms. Net NPAs saw a steeper rise of about 58 percent over the financial year, suggesting that provisioning against bad loans still remains inadequate.
While public sector banks started cleaning up their books in the last two quarters of FY16, a number of private banks pushed the process into FY17. As such, gross NPAs at private banks soared nearly 70 percent during the financial year to Rs 85,063 crore. State-owned banks, excluding the SBI associate banks, reported a much lower increase of about 20 percent, having taken a large part of the clean-up hit in the previous year.
The purging of bank balance sheets began in the second half of fiscal 2016 after the Reserve Bank of India (RBI) concluded an asset quality review (AQR) of the banking sector. The review ended with the regulator asking banks to classify visibly stressed assets as NPAs and to provide for them.
The impact of this review was reflected in earnings starting the December 2015 ended quarter. Analysis of gross NPAs reported by banks before the review, in September 2015, shows that some private banks have seen a steeper jump in bad loans than their state-owned peers.
The sharpest jump has been seen in the case of Axis Bank and Yes Bank, both of whom have seen a more than 300 percent jump in absolute gross NPAs, suggesting these lenders were under-reporting bad loans ahead of the AQR.
Both banks have recently disclosed that there was a significant divergence in their assessment of bad loans and the RBI’s assessment in fiscal 2016. Axis Bank, in an analyst conference call disclosed that this divergence stood at Rs 9478 crore. For Yes Bank, the divergence, as disclosed in its annual report, was at about Rs 4177 crore. The increase in bad loans reported by both lenders in FY17 is a reflection of this divergence.
Among the public sector banks, United Bank of India and IDBI Bank have seen the steepest rise in gross NPAs as a result of the AQR.
As a percentage of total loans, bad loans at public sector banks are much higher than private sector banks, leaving them more vulnerable. As of March 2017, Indian Overseas Bank and IDBI Bank had the highest gross and net NPA ratio.
The high net NPA ratio will mean that a number of these banks will be subjected to prompt corrective action in the current financial year. Under the RBI’s new rules, banks with a net NPA ratio of 6-9 percent will fall under risk category one. Lenders with net NPAs between 9-12 percent of all loans fall into the second risk category, while those with a net NPA ratio above 12 percent fall into the third category.
Drawing attention to the bad loan crisis in the Indian banking sector, consulting firm McKinsey & Co. in a May 17 report said that the total stressed assets of Indian banks, including restructured loans, have now outstripped the combined net worth of the sector. The consulting firm pegged stressed assets at Rs 9.6 lakh crore compared to sector’s net worth of Rs 9.24 lakh crore.
Stagnant credit growth in a low interest rate environment; a high level of stressed assets; and dramatic changes in the technological and regulatory environment are creating a perfect storm-like condition for the Indian banking sector, said McKinsey.