Bad loan creation slowing, says Moody's

Bad loans or non-performing assets (NPAs) will continue to hit the profitability of banks, but the pace of deterioration will be lower, according to rating agency Moody's.

However, the non-fund exposures of banks and the large ticket loans, which are yet to be classified as non-performing, is a near-term risk, according to analysts. The non-fund exposures of banks are not classified as NPAs.

The operating environment for banks, the rating agency said, will remain mixed as the corporate sector is still burdened by high leverage and weak capacity utilisation, despite a broadly stable economy.

Moody's said asset quality will remain a negative driver of the credit profiles of most rated Indian banks. However, the pace of deterioration in asset quality over the next 12-18 months should be lower than what was seen over the last five years, and especially compared to fiscal 2016. "Moody's acknowledges some remaining problem under-recognition in a handful of large accounts. Aside from these legacy issues, the underlying asset trend for Indian banks will be stable because of a generally supportive operating environment."

A senior IDBI Bank official said, "Stress continues in areas where receivables are getting stuck, especially for the EPC projects, discoms or toll collections, leading to a situation where companies are jammed and unable to repay unless the economic revival takes place. When cash flows are getting stuck there is a danger of bigger accounts falling into NPA, but the pace will certainly will be slower as we have recognised many of the big accounts."

Religare Institutional Research said in a report that stress in the system today is poles apart from earlier cycles. Loans are no longer concentrated towards smaller accounts (SMEs) and bloated ticket sizes often deter banks from turning hostile, stressed non-fund exposure is yet to be fully recognised and remains a key near-term risk, and the NPA resolution process is likely to remain protracted despite the upcoming bankruptcy law.

A senior private banker said, "Non fund exposures are not classified as NPAs. So the extend of impairment it can cause to the balance sheet is still not quantified. If the non fund exposures are huge then it is a risk that banks need to acknowledge."

Although banks have been hard selling stressed loans to distressed assets funds and ARCs for the last 6-9 months, the spread between bid and ask rates is still high – at about 25% now, down slightly from 30% at the start of 2016 (which implies that on average ARCs wanted a 50% haircut whereas banks were ready to yield only around 20%), Religare said in the report.