Mahatma Gandhi is depicted on 100 Rupee notes in an arranged photograph in Mumbai, India (Photographer: Scott Eells/Bloomberg News)

Banks Show Drop In Stressed Assets Despite Stricter Deadlines, Says RBI

Indian banks, mainly public sector lenders, were able to reduce the stressed assets even as the Reserve Bank of India laid down stricter timelines for initiating insolvency proceedings.

For public sector banks, the share of loans where repayments were pending for less than 30 days from the due date fell to 6.1 percent of total gross loans as of September from 9.5 percent in March, according to the RBI’s Trend and Progress of Indian Banking Report. Total gross non-performing assets of private banks declined to 7 percent as of September from 7.9 percent in March. Accounts under stressed asset categories also fell.

However, accounts where repayment was due for more than 60 days showed a slight uptick for public and private lenders. State-owned banks reported 1.4 percent of their gross loans under this category in September compared with 1 percent in March, according to the report. For private banks, it stood at 0.7 percent at the end of the second quarter of the ongoing financial year compared with 0.3 percent as of March.

Typically, such a reduction in one category would result in an increase in other stressed asset categories as the pending period after the due date increases. The RBI report, however, said the other buckets of stressed accounts did not show any signs of rapid increase. Total gross NPA ratio for public sector banks fell to 21.6 percent in September from 23.1 percent in March 2018.

In its last assessment of the banking system six months ago, the RBI noted a rise in loans under the first special mention account category as banks were reeling under the new restructuring guidelines introduced by the regulator in February. In March 2018, public sector banks reported 9.5 percent of their loans under SMA-0, up from 2.4 percent in March 2017.

The new framework asked banks to report a default even if the repayment is due for more than a day. Once banks report accounts as default, they are expected to introduce a resolution plan to ensure that the borrower repays dues on time. The banks had 180 days to implement such a resolution plan. If they are not able to resolve the account within this time period, they would have to compulsorily admit the account under the Insolvency and Bankruptcy Code.

The RBI’s Feb. 12 guidelines faced considerable criticism from bankers and lawyers. But the regulator defended saying this was essential to bring in some discipline in the loan market.

“If a borrower delays coupon/principal payment on a corporate bond even for one day, the market would penalise the borrower heavily—the rating would be downgraded, the yields on the bonds would shoot up, cost of further financing would increase and suits would be filed by investors, to name a few. So far, defaults in bank borrowings have not attracted similar reactions,” NS Vishwanathan, deputy governor at the RBI, had said in April.

Sector-Wise Breakup Of Bad Loans

The RBI said the industrial sector contributed three-fourths of total bad loans. The agricultural sector reported an uptick in the gross NPA ratio, possibly reflecting a debt waiver by several states, it said. Bad loans from agriculture rose to 8.6 percent in the year ended March 2018 from 8.3 percent a year ago.

Between April and September 2018, banks reported some moderation in the industrial NPAs due to resolution of certain large accounts. At the same time, the asset quality of loans to the agricultural sector worsened further, the RBI said.

The gems and jewellery sector witnessed a significant rise in gross NPAs in the year ended March 2018 with the unearthing of frauds, according to the central bank. However, sectors such as cement and metals reported a decline in their NPA ratios due to large resolutions under the IBC.