Banks in a spin on shaky textile assets

The Indian banking space is facing serious headwinds when it comes to maintaining their asset quality. The shift from manual to system-driven NPAs, rising interest rate, further exposure to risky sectors like power, textile and the micro-finance and to companies like GTL, Kingfisher, etc are some of the reasons that banks are feeling the heat in maintaining their asset quality.

Today a leading newspaper has reported that banks have an exposure of approximately Rs 1 lakh crore in the textile Industry. The textile ministry and the Indian Banks Association have asked the RBI to look into the matter and allow the banks to restructure their accounts.

Any exposure to the textile sector is being considered risky by banks as the sector has been facing the crunch of a global slowdown. This is evident from their Q2FY12 results.

In our analysis of 360 textile companies, topline growth came in at 16 per cent while bottomline witnessed a loss of 100 crore vs a profit of Rs 1,488 crore in the same period last year.

An aggregate of 235 companies showed negative growth in net profit while 102 companies showed a positive trend. An approximation of 23 companies displayed no growth in the bottomline.

The textile ministry has asked the RBI to take up the issue and help those companies that would like to restructure their loans. The banks will also benefit from this as they will receive some of their outstanding dues.

The ministry also has requested the RBI to relax the existing loan norms also provide working capital finance to these companies. The following table shows the various banks’ exposure (fund and non-fund based) to the textile industry and the percentage of their total advances.

While the move of restructuring will benefit the banks to recover some of its bad loans, the restructuring will increase deterioration in the asset quality of the banks in the coming quarters. Further, the banking sector looks very nervous in the current market conditions. Some of the banking stocks like ICICI Bank and the State Bank of India are currently trading near to their 52-week low.

All eyes are now on the RBI’s monetary policy stance which is scheduled for December 16 to provide proper guidance. This may boost the banking space and the Indian economy.