By Suranjana Roy
A recent report by Care Ratings, entitled Banking Performance: Q3-FY18, states that the gross Non-Performing Assets (NPA) have continued to grow by 34.5% in Q3-FY18 on top of 59.3% last year. The NPA ratio touched 9.45% from 8.34% in Dec 2016. It seems that the bad loans issue hasnt been resolved since the NPA ratio touched 9.45% from 8.34% in Dec 2016.
What are the Non Performing Assets?
Essentially, the NPA is a bad loan in the banking system. It arises when the repayment or instalment of the principal amount in the credit facility has remained past due for a specific period of time. An asset becomes an NPA when it cannot generate income for the lender.
Financial institutions consider a loan to be an NPA when the borrower has failed to repay the principal and interest for almost 90 days. Since banks depend on interest payments for maintaining profit margins, NPA is thus problematic causing disruptions in the national economy. The depositors may lose certain insured deposits or face higher interest rates so that banks can make up for the losses incurred through the NPA. A bad loan is also reflective of the redundant investment on projects. There the NPA ratio (ratio of net NPA to loans) is indicative of the share of bad projects in the economy.
Findings: Impaired assets far from over for the banking system
The report took a sample of 30 banks, including 13 public sector banks (PSBs) and 17 private banks. Growth in interest income in Q3-FY18 was 8.9% as against 2.3% interest expenditure. This could be due to higher growth in bank credit this year (10.7% compared to 4.7% the previous year). Growth in deposits, however, was lower at 4% compared to 14.6% last year. This has resulted in the net profit growth decline relative to Q3-FY17.
While the profits are under strain, the NPA issue deteriorates the situation. Private Banks maintained a Gross NPA ratio of 4.15% through 2016 which was higher than 2015 (2.51%). It is the PSBs which have been impacted more by a loss of incomes with a net loss of Rs 11,000 crores, as provisions were above Rs 51,000 crores.
Having said this, the RBIs decision to tighten rules over stressed loans should be working to improve the recovery situation of bad loans. The resolution plan will be implemented from March 1 and penalizes banks if they fail to recognize bad loans and how to resolve them. The stricter reporting regime also connects to a recapitalization of public sector banks. Such initiatives will seek to lower risks of business uncertainty which special regulations on loans over Rs 500 Crore. Once the banks identify stressed in loan accounts, they will be required to categorise those assets as Special Mention Accounts (SMA).As soon as there is a default in the borrower entitys account with any lender, all lenderssingly or jointlyshall initiate steps to cure the default, the RBI said. Ideally, new norms should be safeguarding assets from insolvency and bankruptcy. However, analysts suggest that about Rs 2.8 trillion worth of loans have the risk of slipping into NPA, with the revised framework. Top public sector banks burdened with the NPAs could find themselves failing to resolve stressed loans further eroding profitability and depleting the already low level of capital. They may be forced to go to the government for more capital. This would just lead to another wave of a financial bailout in the banking sector.
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