The Union finance minister, on the occasion of the 64th annual general meeting of the Indian Banks? Association, expressed concerns and sounded a word of caution concerning the rising bad loans of banks. Institutional investors also voice apprehensions on the topic these days, by asking whether the rise in non-performing assets (NPAs) reported by (SBI) in 2010-11 is a reflection of the banking industry in India. The concerns raised by the finance minister and investors raise the question in one?s mind, how serious is the NPA problem in the Indian banks? Have the NPAs of our banks reached endemic proportions or does the expression of concern need to be seen as wise counsel on the part of Pranab Mukherjee, which needs emphasis at the cost of repetition?
First of all, let?s consider why so much importance is given to NPAs. In plain terms, NPAs mean loans given by banks that have stopped giving returns and are a key performance indicator of banks. NPAs directly eat into the profits of the banks and dampen the return on assets. NPAs are also a reflection of the management of the loan portfolio by a bank. From a macroeconomic perspective, rising NPAs can encourage lazy banking. Especially in an environment of rising yields on G-Secs, banks may alter their preference from lending to investment, thus dampening economic growth.
Now let?s consider what has happened on the NPA front for Indian banks in 2010-11. If we look at the NPAs of the different categories of Indian banks in 2010-11 and 2009-10, a couple of things stand out. First, in absolute terms, the gross NPAs of the public sector, the private (new and old) sector and SBI have increased by 20% in 2010-11 compared to 2009-10. To get a comparative perspective, the gross NPAs had grown 25% in 2009-10 over 2008-09. The net NPAs in absolute terms grew by 11.8% in 2010-11 over 2009-10 and had grown 25% between 2009-10 and 2008-09. SBI has reported the highest NPAs amongst the public sector banks. If we exclude SBI from the analysis, the gross non-performing assets (GNPAs) figures in absolute terms increased by 16.3% in 2010-11. The net NPAs increased by 10.9% during 2010-11.
It is natural to expect that when the loan book grows, there would be some NPAs. Thus, the growth in NPAs has to be seen in conjunction with the growth in the loan portfolio. The loan portfolio of the banks under consideration increased by 25% during 2010-11. The higher growth of the loan portfolio compared to the GNPAs should be a matter of some comfort. For SBI, the growth in NPAs at 30% in 2010-11 was significantly higher than its loan growth of 20%. Thus, if we exclude SBI from the analysis, the growth in the NPAs position of the banks in India in 2010-11 looks a much more comforting figure.
The reported NPA numbers of a bank for any given financial year, say 2010-11, would depend on the fresh addition to NPAs or slippages during the year and reduction of NPAs during the year through recovery, upgradations and writeoffs. The delinquency ratio, computed as a ratio of the addition to NPAs in a given financial year upon the gross advance figure of the previous financial year, is a good indicator of the quality of the loan portfolio. Deterioration in the delinquency ratios is a clear reflection of the management of asset quality of a bank.
Fresh slippages of banks are not readily available. However, one can get the numbers on fresh slippages from the notes on accounts to the balance sheet or from the analysts presentations of the concerned banks. A look at the fresh slippages or the delinquency ratio of the six major nationalised banks reveals a mixed picture. While this ratio increased for three banks in 2010-11 compared to 2009-10, it declined for another three. The average delinquency ratio for the six major banks, however, improved to 1.43% in 2010-11 from 1.55% in 2009-10. For SBI, on the other hand, this ratio deteriorated from 1.85% in 2009-10 to 2.35% in 2010-11.
Another issue related to the management of NPAs is the extent of writeoffs. Writeoffs can reduce NPAs, but would affect the bottom line and thus would dampen the return on assets (RoA). Writeoffs increased for both the nationalised banks and SBI in 2010-11 compared to 2009-10. The increase was 45% for the six major nationalised banks compared to 101% for SBI. Although writeoffs have increased, except for SBI, the RoA of the six nationalised banks has also increased in 2010-11. Thus, the NPA problem has not been so endemic as to dampen the profitability of a cross section of banks.
Another futuristic way of gauging the health of banks is the provision coverage ratio (PCR) for the banks. The PCR indicates to what extent banks have cushioned themselves against possible losses on account of NPAs by setting aside funds from their profits. As a matter of prudence, the Reserve Bank of India mandates that banks should maintain a minimum PCR of 70%. As on March 2011, the PCR of all categories of banks, except of SBI, was above the mandated requirement. The PCR of SBI was below 60% in 2009-10 and has increased to around 65%, but is still below the mandated requirement. The rise in provisioning by SBI in 2010-11 is partly responsible for its dismal performance on the RoA count in 2010-11.
The NPA numbers thrown by banks in 2010-11, except for SBI, should actually give a lot of comfort to the different stakeholders. On balance, we can say that the NPAs of SBI blur the overall picture of NPAs for the Indian banks. At a juncture when banks are going for system-generated NPAs, the situation on the NPA front will come out more clearly in this financial year.
The author is chief economist, Bank of India. Views are personal