Stockpile of bad loans at $173 billion in FY17-end. India banks are saddled with Rs11.3 trillion of bad loans at the end of FY17 across various stress buckets, with SOE banks adding to 89% of the stresses.(Reuters)Stockpile of bad loans at $173 billion in FY17-end. India banks are saddled with Rs11.3 trillion of bad loans at the end of FY17 across various stress buckets, with SOE banks adding to 89% of the stresses. This is 14.7% of loans – we don’t have precise data, but was about 13.5% in FY16. The power sector could pose a further threat to this number. Lower provisioning levels at banks would challenge RoE expansion expectations across the sector.
Aggregate stress in 41 banks put together accounted for 14.7 % of loans. The loan’s share of this was NPLs at 69%, restructured assets at 17%, 5-25 at 5%, SDR at 4%, ownership change outside SDR scheme at 1%, S4A at 1% and security receipts at 3%. That for SOE banks was no different, as they largely account for 89% of total stress in the system. Based on our calculation, the aggregate stress was about 13.5% in FY16, and in aggregate was about Rs9.6 trillion. This is roughly over 10% increase over the previous year.
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Aggregate provisioning level is 45% across the sector and only a marginal difference between SOE and private banks. We continue to believe that the power sector is a source of additional stress that is largely unprovided for at this stage. Further, with 12 large stressed assets being resolved through the insolvency/ resolution process at NCLT, we are challenged to arrive at any real recovery rates or need for additional provisions – though we tend to be biased towards the latter. We believe that corporate sector-exposed banks may need significant provisioning over the next 4-6 quarters. We, therefore, are broadly conservatively positioned in owning these stocks with both ICICI Bank and Axis Bank at ‘hold’. Should banks manage to work out better recovery rates of the assets in the resolution process, our book value estimate would improve across banks.