With Rs 7 lakh crore loans under stress, banks sitting on a time bomb

Banks are creaking under the burden of their bad loans. By end of December 2015, loans worth over Rs 7 lakh crore have gone under stress -- classified either as non-performing as borrowers have not repaid the principal or the interest for over 90 days, or restructured where the banks have given the borrowers a longer tenure to repay the loans. This includes about 6% of the gross NPAs and 5.1% of standard restructured assets.

What is more, about 25 banks together have written off Rs 25,000 crore loans in the third quarter. Of this, seven banks wrote off Rs 11,811 crore worth of loans alone in the third quarter that ended December 31, 2015.
A majority of the loans are from infrastructure sectors, led by steel and power, while other sectors such as telecom, commercial real estate and textiles also contributed.

The spurt in the bad loans was the result of an asset quality review by the Reserve Bank of India (RBI) in the third quarter, which threw up several weak accounts, most of which are to the infrastructure sector. The RBI governor Raghuram Rajan said at a conference last week, "The clean-up exercise will lead to stronger balance-sheets for banks."

Arundhati Bhattacharya, chairman, State Bank of India (SBI), also acknowledged that the pain would last for a while before it gets better. In the SBI results press conference last week, she said, "Most of the pain will be taken to the extent possible within the year. But yes, some of it will spill over to the next financial year as well. We are now lending to better rated companies and keeping a strict vigil on recoveries. Even in written off accounts, recovery efforts are on".

The situation is expected to continue into the fourth quarter when banks have indicated that the similar amount of loans would turn bad and the gross NPA numbers would be high. But banks are also stepping up the recovery efforts. Only Bank of Baroda has said that the entire cleaning up after the RBI asset quality review was taken in the third quarter itself.

Rajat Bahl, director, Crisil Ratings, said, "The banking system (excluding foreign banks) reported gross NPA of Rs 4.5 lakh crore, or 6%, at the end of December 2015, as against Rs 3.1 lakh crore, or 4.3%, at the end of March 2015. Crisil computes weak assets to measure the true stress in the banking system. We had earlier estimated the weak assets to be at 6.3% for the current year. We now believe that the weak assets will be significantly higher on account of various reasons such as the severe downturn in global commodity prices, inability of the leveraged players to sell assets and the proactive identification of stressed assets as part of RBI's asset quality review. This will continue to put pressure on profitability and credit quality of banks especially public sector banks."

Mounting losses due to bad loans have eroded the profitability of all banks with 11 public sector lenders reporting losses of Rs 12,867 crore.The loan book review by the central bank tried to bring out the actual stress in the banks' book.

Bank of Baroda posted the a loss of Rs 3,342 crore highest quarterly loss by any bank as they undertook the cleaning up exercise in one quarter. RBI had asked the banks for higher provisions in 30 accounts of the bank to be spread over the third and the fourth quarters but the bank decided to do it in a single quarter.

IDBI Bank recorded the next highest loss at Rs 2,184 crore followed by Bank of India at Rs 1,505 crore, UCO Bank at Rs 1,497 crore, Indian Overseas Bank at Rs 1,425 crore, Central Bank of India at Rs 837 crore, Dena Bank at 663 crore.

Allahabad Bank (with a loss of Rs 486 crore), Oriental Bank of Commerce (Rs 425 crore) and Corporate Bank (Rs 383 crore) and Syndicate Bank (Rs 120 crore) were the other banks that are in the red in the third quarter.