One of the actions that Raghuram
Rajan took, as the RBI governor, was to ensure that the banks did a serious
clean up of their loan portfolio. This resulted in the banks reviewing their
portfolio and reclassifying their NPAs. In this post, I try to look into the
numbers and analyze if the worst is over or yet to come.
Non-Performing Assets (or NPAs)
are those assets where there is a delay in interest or principal for 3 months
or more. These are also referred to as Gross NPAs. Net NPAs refer to the NPAs
after reducing the provisions set aside by the banks.
At the end of March 2016, the
Gross NPAs of all the 41 listed banks reached a record high of INR 5.79
Trillion. It has increased by 92% when compared to March 2015 and by 32% when
compared to December 2015. Public Sector Banks accounted for 91% of the GNPAs
(they are 61.54% of the total number of banks) registering a 95.67%
increase compared to March 2015. However, the private banks accounted only for
9% and registered a 60.34% increase in GNPAs. The below chart shows a systemic
rise in the Gross NPAs of all banks over the last 1 year:
So, should we really worry about
the increase in the absolute amount of Gross NPAs? Or should we really look at
another metric that will tell us if the problem is bigger than imagined? The
best metric that can help us clear things is to look at the ratio of Gross NPAs
to Advances. This indicates what proportion of advances are NPAs. Advances
refer to the total amount given away as loans by the bank. If you see the chart below:
7.71% of the total advances have
been identified as Gross NPAs by the banks as of March 2016, up from 4.32% a
year ago. Once again, public sector banks lead the way by declaring 9.36% as
Gross NPAs (4.96% in March 2015). What this means is that 1 out of every 10
rupees is deemed to be doubtful to be recovered by the bank. The comparable
ratio for private banks stands at 2.76%. The reason the ratio has grown so high
in this period is because the growth in advances has reduced compared to the growth
in bad loans.
Public Sector Banks:
The Gross NPA ratio of the public
sector banks stands at almost 10%. Does it mean that all public sector banks
are leaking and have NPA issues? Or are there some banks that are in a worse
situation than the others? The chart below helps us understand that better.
There are 3 banks that have the
worst offenders in their books. They are Indian Overseas Bank, UCO Bank and
Union Bank of India. IOB is the worst of the lot with nearly 1 in every 5
rupees declared a NPA. Associate banks of SBI like State Bank of Bikaner and
State Bank of Travancore have the best NPA ratios with both being less than 5%.
Even though Indian Overseas bank
has the highest NPA Ratio, do they also account for the highest amount of NPAs?
Or is there any other bank that holds the dubious distinction?
Even though IOB has the highest
Gross NPA ratio, it is the State Bank of India that has the most NPAs at 981.73
Billion rupees. Punjab National Bank is the second highest with 558.18 Billion.
IOB is fifth in the pecking order with 300.49 Billion which is only 30% of the
total NPAs of State Bank of India. The primary reason for the high NPAs seem to
be the exposure of the banks in the Iron & Steel, Energy and Textiles
sectors.
Private Banks:
The Gross NPA ratio of the
private banks, on the other hand, is way lower at 2.76%. This helps the private
banks operate at a higher level of profitability.
Jammu and Kashmir Bank has the
worst NPAs among the private sector banks at over 8% followed by Dhanalakshmi
Bank and ICICI Bank. Dhanalakshmi Bank saw its NPAs come down by over 330 basis
points compared to the previous quarter where as most of the banks have reported
an increase. ICICI Bank, however, saw a 54% jump in their NPAs compared to last
year. However, Yes Bank, Indusind Bank and HDFC Bank have NPAs of less than 1%.
It is not surprising to see ICICI
Bank top the list of private banks with most NPAs at 211.50 Billion rupees with
Axis Bank as the 2nd highest with 57 billion (nearly 1/4th
of ICICI Bank). Dhanalakshmi Bank ranks 10th with just close to 7
Billion rupees as NPAs.
The Reserve Bank of India has
asked the banks to recognize the really bad loans by end of Financial Year
2017. This can mean only one thing. There are going to be more provisions set
aside by the banks in the quarters to come. Also, the banks have been asked by
the RBI to provide for 15% of all the loans that are part of the Strategic Debt
Restructuring scheme. This is way higher than the earlier rate.
The NPA saga is far from over.
Like Shah Rukh Khan says in one of his super hit movies, ‘Picture abhi baaki hai mere
dost’…
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