DNA Money Edit: Banks face NPA pile-up as economic growth engine slows

As India’s economic growth slips to the lower end of the 5-8% range and companies grapple with demand slowdown and production cuts, banks are staring at a huge pileup of bad assets. Crisil Ratings on Thursday said banks have only recognised two-thirds of their stressed loans as non-performing assets and estimated the bad loan ratio to rise by 1% to 10.5% of advances by March 2018. As per the estimates, the total amount of stressed loans, which includes NPAs and standard assets that are under pressure currently and could deteriorate into NPAs, stands at Rs 11.5 lakh crore (around 14%). A lion’s share of NPAs has come from infrastructure, power, engineering and construction sectors.

On their part, banks are struggling to clear NPAs through the Insolvency and Bankruptcy Code (IBC) and various structuring schemes. The IBC route is more time-consuming as big promoters seek legal remedies to stop lenders in their tracks. If stressed accounts are small-sized and do not involve a lenders' consortium, banks are happy to solve them through one-time settlements. Data shows that every bank is undertaking Rs 100 crore to Rs 200 crore worth of one-time settlements every quarter.

Farm loan waivers, demonetization of high-value currency notes and the rollout of goods and services tax have all played havoc with banks, albeit in the short-term. Definitely, there will be deterioration in asset quality of loans to small businesses and farmers. As Crisil predicted, fresh NPA creation may decelerate this fiscal, but the overall stock will continue to rise because slippages would still outpace recoveries.