While many, including in some rating agencies, believe the worst of India’s NPA growth may now be over—dodgy loans with India’s banks rose from 5.6% in March 2011 to 11.5% in March 2016—a recent study by the central bank suggests the pain may not be over as yet, even if economic growth picks up. In FY16, despite sales growth slowing, that in profits rose due to the fall in commodity prices—so, if sales growth picks up in FY17 but commodity prices start rising, or stabilise, profits may not rise as fast as earlier. More important, as RBI points out after examining the annual results of over 1,700 manufacturing companies over five years, the debt-at-risk continues to rise, even if at a slower pace in FY16—while RBI is looking only at companies who have a debt-equity ratio of more than two and an interest-cover of less than one, even companies that have an interest-cover of, say, 1.2 would be vulnerable. According to the RBI analysis in the latest monthly bulletin, the number of vulnerable companies rose from 224 in FY12 to 279 in FY15 and 283 in FY16—the debt with these companies, defined as debt-at-risk rose from R495,900 crore to R679,200 crore and R691,400 crore in the same period. As a share of total debt of the 1,700 companies, the share of the risky debt rose from 11.9% in FY12 to 29.9% in FY15 and to 30.4% in FY16. That, it is true, represents a significant slowing, more so if you take out the iron and steel companies which are especially vulnerable.
What RBI doesn’t tell us, and this is what really matters for NPAs, is how much of this debt has been classified as dodgy by banks. The latest update of Credit Suisse’s House of Debt series in February had said that just 10-20% of loans to steel firms had been recognised as impaired by most banks. While RBI had not responded to the report, it is equally important to keep in mind the large amount of loans in the SMA2 category—where repayments are overdue by more than 60 days—as well as the large slippages in the loans that have been restructured. All told, it signals the possibility of NPAs rising a little while down the line.