Bad loan burden: Three reasons because it’s a prolonged and tough drawn conflict forward for Indian banks

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The some-more than 11 percent unsettled item (NPA and restructured asset) in a Indian banking system, aggregating over Rs 7 lakh crore, is a formidable problem to solve. Of course, a Indian banks have solved such problems in a past. The rise NPA of 15.7% (gross NPA as a commission of sum advance) in 1996-97 took 8 years to tumble to 5.2% in FY05.



However, afterwards a proportional tumble in NPA had some-more to do with a reconstruction of loan expansion mostly to vast corporates that in spin was driven by reconstruction of domestic growth. It might be argued that this time turn it might not be easy for a banking complement as a whole to revitalise in subsequent 3 to 5 years.

There are several reasons for this. For one, loan expansion is unlkely to collect adult given a decadal debility in corporate credit profiles. Close to one-third of vast corporates hardly acquire adequate handling distinction to even use their seductiveness rate. Given a clever disinflationary trend in a economy, a conditions might not urge significantly in a subsequent 18-24 months by organic expansion alone.

Understandably, a banks are discreet about holding incremental exposures to over-leveraged corporates. This is reflected in a sub-10% on-year expansion witnessed in altogether industrial loans over a final 15 months.

As such, these over-leveraged corporates are doubtful to find any non-banking lenders who might lend them during cost effective seductiveness rates. Thus banks and over-leveraged corporates sojourn married to one-another during slightest in a foreseeable future.

Secondly, corporates with stronger credits have started looking over banks. Among a 500 largest corporate borrowers, usually around 80-100 corporates might now take incremental debt yet serve jeopardising their credit profile. However, these corporates are not queuing adult during a banks’ doors for loans yet are drumming a collateral markets instead.

Given their improved credit profile, a lot of them are means to emanate blurb paper (CP) – debt confidence with majority subsequent 12 months – during rates good subsequent bottom rate. The bottom rate for a bank is a lowest seductiveness rate that bank can assign for any loan. CP volume shot adult to around Rs 3.2 lakh crore from around Rs 1.8 lakh crore 15 months back, exhibiting some-more than 60 percent expansion in a duration when bank loan expansion struggled. Some of these good credits have also tapped outmost borrowing during cheaper rates.

They are doubtful to move behind poignant business to Indian banks unless a banks revoke their bottom rate. Clearly, flourishing their loan book to revoke a NPA rate does not demeanour an choice no matter how most a banks might like it.

Thirdly, sell indeed offers hope, yet it is a tough quarrel out there. While a final 15 months paint a longest widen of singular number industrial loan expansion in good over a decade, personal loan exhibited a expansion of 13-17 percent. Likewise, expansion in a priority zone lending, yet not as strong as sell loan expansion has grown faster than industrial loan growth. Had it not been for a loan expansion from these dual sectors, that accounts for approximately 40 percent of sum loan assets, a total NPA rate of Indian banking complement would have looked worse.

However, it might be rather confident to assume that tiny sheet loans would yield a approach out of banks’ high NPA rate due to a tough foe in a market.

Recently State Bank of India (SBI) authority Arundhati Bhattacharya called for converging of a banking zone with a design of carrying four-six vast banks. Previously, utterly a few bankers have stressed a need for India to have incomparable banks as against to some-more banks.

The heated foe lead to bad adoption of risk-based pricing that might be partially obliged for a stream NPA problem with honour to vast corporate loans. Now with a introduction of Small Finance Banks (SFBs) a foe for sell loans and SME loans will intensify.

This might potentially dispossess a existent banks of a expansion that they continue to suffer in sell and SME and other priority zone space. One might not order out increasing pricing vigour on such loans that might impact a profitability.

Fortunately for a existent concept banks, a SFBs as good as a dual banks that have got new licences might need a integrate of years to muster their banking infrastructure with some suggestive scale. The existent banks might do good to keep their sell and SME banking machine well-oiled quite in terms of risk government and patron service. Inability to do this in subsequent 2-3 years will make them exposed to assault from a newcomers.

The author is a visiting expertise during IIM Calcutta and a financial services professional.