In case finance ministry mandarins are planning on using RBI?s improved profitability/asset quality summary to convince Moody?s that India?s credit rating needs to be upped a few notches, they?d be advised to read just a few more paras in the banking trends report that talks of the ?emerging concerns? about ?disproportionate growth in credit to sectors such as real estate, infrastructure …? Infrastructure loans, to put matters in perspective, rose R90,000 crore in the last one year, from R4,70,000 crore last year in September to R5,60,000 crore in September this year. RBI?s not taking any call on how much of this can go bad, but keep in mind the Crisil report which estimated R56,000 crore of power sector loans could go bad in the next 18 months without power reforms. Add Air India and Kingfisher to this, and you get an idea of what the banks are likely to come up against in the near-term.
But haven?t NPLs gone down dramatically from 15.7% in March 1997 to 2.25% at the end of March 2011? Of course they have but, as RBI points out, they are steadily rising once again despite the fact that larger profits in earlier years allowed banks to write off bad loans?10% of outstanding bad loans were written off in 2010-11?which ?was an important factor in maintaining the asset quality of the banking sector at tolerable levels?. So profitability of the banking sector is very important, and that is what gets hit during a downturn which adds to pressure since banks also need to make more provisions for bad loans. An important point made by RBI is that 44% of all incremental NPLs in 2010-11 were on account of increased loans to the agriculture sector?given how infrastructure loans have risen at an equally fast pace, the same fate likely awaits this sector. Infrastructure loans, as a proportion of industrial credit, are up from 29% in 2009-10 to 33% in 2010-11. In the event, RBI suggests banks work on improving their profitability but, as the accompanying column (Trim your costs, not your sails) explains, that is going to be more difficult in the immediate terms. With higher provisioning norms for Basel III, this is not a good time to be a bank in even India since, as RBI says, banks ?require … to use innovative and attractive market based funding channels, especially when capital continues to remain expensive and Government support may be constrained by fiscal considerations?.
