Loan defaults to rise alarmingly this year – Assocham study on bank NPAs

The net non-performing assets (NPAs) of the banking sector in India are increasing at an alarming rate and may cross Rs 2 lakh crore for the fiscal year ending March 2013 from Rs 1.57 lakh crore as in June, 2012, according to industry body ASSOCHAM.

Besides, the continuing pressures on Indian economy may also result in pushing the NPA ratio from 2.94 in June end to about 3.75 by the end of the current fiscal, it said in a report.

“A plethora of issues like rising trends in stress assets, increased provisioning, issues of the asset quality and challenges of requisitioning additional capital to keep up growing business together with burgeoning twin deficits of fiscal and current account have collectively contributed to this dismal situation of increased NPA levels and falling bottom line,” said Mr D.S. Rawat, national secretary general of ASSOCHAM while releasing the findings of the study.

The phenomenon can also be seen as a part of the ongoing slowing down of economic production due to high inflation, interest rates etc..

“Besides, the credit off take has also sharply tanked due to various issues like environment related approvals, land acquisition and other such issues,” said Mr Rawat. “Existing exposure of banks to poor performing sectors like power, aviation, highways, micro-finance institutions (MFIs), ports, telecommunication and others have lead to high levels of stress assets.”

“The ASSOCHAM study is a reality check and a wake-up call for the government and it should continue with its sincere efforts to arrest the economic slide,” said Mr Rawat.

ASSOCHAM study has further projected that banks’ restructured advances would also be as high as about six per cent by March, 2013.

The further impact of the various external factors like – court interventions, delay in reforms, reluctance of passing cost to consumers, absence of clarity on various tax issues, have created an environment of uncertainty resulting in slow pace of economic activities.

Apart from this, growing slackness in performance of small and medium enterprises (SMEs) and agriculture sector are signs enough to show that banks’ NPAs are bound to rise, according to the ASSOCHAM study.

Besides, a strong deceleration expected particularly in fourth quarter of the current fiscal and fist quarter of the next fiscal will also have a negative impact on asset quality of Indian banking industry.

“Growing inability to raise adequate equity in a time-bound manner due to high volatility and depressed condition on capital markets is straining companies’ balance sheets and financial flexibility of players in vulnerable sectors like infrastructure, construction, iron and steel, textiles, engineering and others, which has resulted in increased likelihood of restructuring,” said Mr Rawat.

“Besides, the government is expected to further liberalise restructuring norms to give adequate financial support as well as reasonable time-frame to restructure the debts including concessions in interest rates and other reliefs,” said Mr Rawat. “Further, the banks must support all reasonable restructuring proposals to enable the industries to restore their activities.”

ASSOCHAM said it hails the recent overdrive of reforms initiated by the prime minister and the finance minister which has revived the hopes of certainty and trust amid investors and industry as reflected in the positive performance of capital markets and appreciation of rupee.

“ASSOCHAM strongly foresee the reform process to continue thereby putting the economy back on high growth trajectory,” said Mr Rawat. “We together with the government are making significant efforts to take all the stakeholders on board as there is every possibility of a turnaround.”

ASSOCHAM has taken an initiative through its ‘Retail India Campaign’ to educate and inform the people about the necessity of these tough decisions as we cannot allow the country to sink further.