An Indian Army soldier stands on a Schilka air defense weapon system. (Photographer: Dhiraj Singh/Bloomberg)

Has A New Front Opened In The Battle Against Bad Loans?

Indian lenders, already weighed down by large corporate advances going bad, saw stress build up in other loan segments like agriculture and small and medium enterprises (SME) in the April-June quarter, which further pushed up non performing assets (NPAs). Defaults emerged as a consequence of farm loan waivers and the expiry of regulatory dispensations given at the time of demonetisation, said bankers who remain hopeful that some of this will reverse in the coming quarter.

Gross bad loans for 37 listed banks for whom comparable data is available, rose to Rs 8.29 lakh crore as compared with Rs 7.77 lakh crore in the January-March quarter. In the same quarter last year, gross NPAs for this set of lenders stood at Rs 6.32 lakh crore. The 6.6 percent quarter-on-quarter increase shows that while the pace at which bad loans are being added may have slowed, bank balancesheets remain susceptible to new sources of stress. Net NPA of these banks reached Rs 4.66 lakh crore, up from Rs 4.30 lakh crore in the previous quarter and Rs 3.70 lakh crore in the same quarter last year.

Has A New Front Opened In The Battle Against Bad Loans?

Non-Corporate Bad Loans: A New Threat?

In the large corporate segment, banks are still dealing with sectors like telecom and power, where fresh stressed assets could emerge. The surprise in the April-June quarter came from a reported rise in bad loans in the agriculture, SME and retail loan segments.

On Friday, the country’s largest lender State Bank of India said that Rs 17,886 crore out of the Rs 24,249 crore worth of loans that slipped into the bad loan category during the quarter were from the retail, agriculture and SME segments. About 40 percent of these slippages came from the bank’s agriculture loan book, 35 percent from SME loans and 14 percent came from low-risk housing loans. In cases where a borrowers’ farm loan had slipped into the NPA category, repayments on home loans became overdue as well, the bank’s management explained.

At the end of the June quarter, SBI’s consolidated bad loans stood at Rs 1.88 lakh crore, accounting for nearly 10 percent of the bank’s total loan book. 18 percent of its total corporate loan book has turned bad. In the SME and agriculture segment, 12 percent and 9 percent of the loan book has turned bad.

Some part of this will be recovered after states make good on payments due for farm loans waived, said Rajnish Kumar, managing director of the national banking group.

“We should get about Rs 3,000 crore from states within two months for payments against the farm loan waivers. We are certain that the slippages can be cleared,” Kumar said. He added that in the SME segment, generation of bad loans was bunched up because the Reserve Bank had given small borrowers a 90-day relief for repayments to tide over the cash crunch that followed demonetisation announced in November 2016.

The bank hopes these temporary factors will abate soon.

Lower retail slippages and higher recoveries will lead to reduction in retail NPAs. Our slippage ratio will decline from 5.38 percent in Q1FY18 to below 3.3 percent for FY18.
Arundhati Bhattacharya, chairman, SBI

SBI is not alone in facing trouble in the non-corporate loan segment.

For Bank of Baroda, about half of Rs 4,384 crore in slippages during the quarter came from the non-corporate loan book. The bank said that Rs 868 crore worth of agriculture loans slipped to the NPA category in the June quarter, of which, Rs 600 crore slipped due to the farm loan waivers. Similarly, the bank saw stress from the micro small and medium enterprises (MSME) loan book, where Rs 1,050 crore worth of loans slipped.

Others like Union Bank of India, Bank of India and even private sector lender HDFC Bank, all saw agriculture and SME loans add to the gross NPAs in the June-ended quarter.

Analysts hope the increase in non-corporate NPAs is an exception rather than a trend.

We don’t see the increased slippages in retail and SME as a big change in trend right now. These are short term pressures which should subside. Agricultural loan book may take about a quarter to improve. 
Siddharth Purohit, Banking Analyst, Angel Broking

Power Stress Rising

In the corporate loan segment, power loans are proving to be a trouble spot for banks.

Private sector lender ICICI Bank reported an increase in its ‘drilldown’ list of potentially stressed loans. The size of this pool of loans increased to Rs 20,300 crore as on June 30, from Rs 19,039 crore at the end of the last financial year. This was primarily because the bank downgraded some power sector loans, which then got added to the list. Axis Bank, too, reported rising stress from its power loan portfolio. In the case of SBI, a third of its watch-list of stressed loans now comes from the power sector.

On August 10, BloombergQuint reported that if states push for renegotiation of power purchase agreements, upto Rs 1.5 lakh crore in bank loans could be put at risk.

“The stress from corporate loan book does not look like it is going to subside very soon. Banks are still struggling with the rising bad loans there. The expectation that the next financial year might be the year of growth, may have to be realigned,” Purohit from Angel Broking said.

Care Ratings shared a similar view in a note issued on August 9.

It does appear that the NPA issue is still not quite settled as the ratio has increased in Q1FY18 after witnessing a marginal decline in Q4FY17...Hence this ratio will need to be monitored more closely.
Care Ratings

The Worst Of The Lot

Some of the worst performers during the April-June quarter include IDBI Bank with a gross NPA ratio of 24.1 percent, Indian Overseas Bank with a gross NPA ratio of 23.6 percent, UCO Bank with a gross NPA ratio of 19.87 percent and Bank of Maharashtra with a gross NPA ratio of 18.59 percent.

Each of these banks have been subjected to RBI’s prompt corrective action prescribed for weak lenders which breach certain thresholds.

The aggregate gross bad loans of public sector banks stood at Rs 7.38 lakh crore at the end of the June quarter compared to Rs 6.92 lakh crore at the end of the March quarter.

The build up of bad loans had started after an asset quality review conducted by the RBI in 2015 pushed lenders to classify stressed loans appropriately. Between the September 2015 quarter and the June 217, aggregate bad loans for this set of lenders have more than doubled from Rs 3.4 lakh crore to nearly Rs 8.3 lakh crore now.

Has A New Front Opened In The Battle Against Bad Loans?