Banks Face Headwinds As NPAs Rise

The Indian banking space continued to face serious headwinds when it came to maintaining their asset quality. In a higher interest rate environment, the probability of the individual to repay gets lesser leading to a rise in defaulters. Further, the slowdown in the corporate world has increased the corporate debt restructuring and non-payment of their loans, leading to a surge in banks Non Performing Assets (NPA). NPA is one of the key parameters for gauging banks performance, and rise in the NPA levels is not good for the health of the banks. The NPA levels which showed some signs of moderation in March quarter of 2012 again deteriorated in June quarter further raising concerns over the sector.

Further, according to latest media reports, debt restructuring cases are rising every month. In July alone, there were additions of 19 cases amounting to around Rs 11,500 crore. Banks are showing fresh non-performing assets (NPAs) that translate into erosion of profit margins. The ratio of the total restructured advances to total loans increased to 4.68 per cent in March 2012 against 3.45 per cent in March 2011. As on 31^st March 2012 aggregate advances of all the banks stood at Rs 50,40,268 crore and therefore restructured advances stood at approximately Rs 2,36,000 crore.

Further, according State Bank of India (SBI) management, from its recent and past restructuring trend it probably thinks that of the restructured book approximately 3 per cent turns into eventual loss. If we consider SBI as a base, then eventual loss for the banking space could be around Rs 7000 crore for FY2012. This is approximately 8 to 9 per cent of the banks profit of FY2012.  

In simple terms, this means that if a bank has given loans of Rs 2000, restructures loans amount to Rs 100. Of that around 20 per cent (Rs 20) turns into Non Performing Asset (NPA). Here one should note that, if the borrower has failed to make interest or principal payments for 90 days then the loan is considered to be a non-performing asset. And hence many times borrowers due to various reasons delay in making payments, but eventually they clear off their amounts. Therefore the loan turning into NPA does not mean that all of the same is the potential loss for the bank. Here the eventual loss would be approximately Rs 3, which the bank would unable to recover from the borrowers.

We have a list of 14 major banks which together comprises the BSE Bankex Index. The June quarter of 2012 saw a rise in NPA levels not only on a sequential basis but also a year on year basis. The following table shows Net NPA’s movement of 14 major banks during the June quarter:

Overall, we at Dalal Street Investment Journal believe that bank would continue facing serious challenges when it comes to their asset quality. Inflation still remains sticky which would further make the RBI to maintain a status quo in its fourth-coming monetary meet further increases the chances of rise in NPA’s. We believe one has to be really stock specific while selecting from the banking space.