With more non-performing assets (NPAs) ‘ageing’, and consequently requiring more provisions, banks’ profits could continue to be under pressure for another year. That’s unless a meaningful chunk of these bad loans are recovered. For a clutch of 21 public sector banks, profits in 2016-17 totalled just Rs 474 crore compared with Rs 40,123 crore earned by 16 private sector banks. The cumulative provisions on account of ageing for just four banks—State Bank of India, Punjab National Bank, Axis Bank and ICICI Bank — are an estimated Rs 80,000 crore at the end of March.
Analysts expect the provisions for the sector could be more than twice this quantum given the asset quality at some banks is quite poor. The extent of the NPA problem can be gauged from the fact that around Rs 10 lakh crore of loans are either non-performing or stressed; this is roughly 12% of total loans. McKinsey & Company believes current levels of provisioning are inadequate; it reckons there is a shortfall of nearly Rs 6 lakh crore. Other analysts have estimated a gap of between Rs 3-4 lakh crore but cautioned slippages may exceed current expectations.
Data for four large public and private sector banks — State Bank of India (SBI) group, Punjab National Bank (PNB), ICICI Bank and Axis Bank – showed the maximum increase has been in the doubtful loans 2 category which are loans that have remained delinquent for anywhere between two and four years. These have risen around 88% to Rs 1.06 lakh crore between FY16 and FY17. Banks have provided the data on ageing loans as part of the Basel III disclosures.
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The other two categories of loans –doubtful 1 and doubtful 3– saw an increase of 25% and 62%, respectively, in FY17. Public sector lender Punjab National Bank (PNB) has also seen a 63% rise in doubtful 2 loans to Rs 18,787 crore and a subsequent 14% rise in bad loan provisions to Rs 23,637 crore in FY17.
However, for private banks like ICICI Bank and Axis Bank, more bad loans are housed in doubtful 1 category than other segments. While ICICI Bank saw a 62% rise in doubtful 1 loans in FY17, Axis Bank witnessed more than quadrupling in the same category. Total provisions for ICICI Bank rose 88% to Rs 15,208 for the full year of FY17 and Axis Bank’s bad loan provisions more than tripled to Rs 12,117 crore in FY17.
According to Reserve Bank of India (RBI) regulations, banks are required to set aside a specific sum of money as buffer against a loan that could turn into a non-performing asset.