Banks and other financial institutions may be creating a backlog of non-performing assets. The slowdown in economic activities across the world has deteriorated the financial strength and loan repayment capacity of companies as well as individuals, raising concerns of increase in the non-performing assets for banks and non-banking financial institutions. Adding to this likelihood is the lax attitude of some financers in sharing the credit-related information of borrowers to Credit Information Bureau (India) Ltd(Cibil).
Before the spillover of the United States? financial crisis to India in September 2008, Reserve Bank of India (RBI) had raised short-term lending rate, repo rate, and mandatory cash reserve ratio to 9% each to tame the ballooning inflation, prompting banks to hike their benchmark prime lending rate to as high as 17%.
After September, RBI eased the situation for banks to encourage higher lending. In the year to January 2, 2009, loan book of scheduled commercial banks grew 24% against 21.4% a year ago. Increase in non-food credit was 24.8% during the year ended December 19, 2008 against 21.8% in the previous year.
On the other side, provisional data collected by the government reflected that industrial production during April-November 2008 expanded 3.9% against 9.2% a year ago. Companies recorded 2.6% drop in profit after tax in the second quarter of 2008-09 as compared to a growth of 22.7% in the corresponding period last financial year. In the first quarter, profits rose 6.9% against 33.9% in the corresponding period of the previous year.
As many as 5 lakh jobs have already been lost in India since the global meltdown was triggered after Lehman Brothers imploded in September 2008, according to a sample survey of the employment scenario conducted by the labour ministry. And the employment outlook is likely to get worse.
?Many banks are not disclosing information to the bureau (Cibil). There have been instances where a person has taken loans for the same purpose from many lenders. This mainly happens in case of personal loans. Under such a situation, if a bank is giving loan to a person, it becomes really difficult to ascertain whether that person has availed of loans from other lenders and what is his repayment history. Such situations increase the risk of NPAs to the financial institutions,? a senior official of a state-run lender said.
Cibil was incorporated in year 2000 to enable banks to identify entities which have had bad loan history with other lenders and hence reduce the possibilities of further increase in bad assets in the banking system. The bureau shares the desired credit information with financial institutions based on the principle of reciprocity. Banks, NBFCs, housing finance companies and credit card companies use Cibil ?s services.
When asked if banks provide credit information to Cibil, a spokesperson said, ?It is difficult to tell how many do that.? Though he stressed that most banks are members of Cibil, he didn?t reveal how many are not. At present, 166 credit grantors are Cibil members, as per Cibil?s website. These include 81 banks, which account for over 90% of the total credit outstanding amongst the commercial banks, including State Bank of India, ICICI Bank, Citicorp Finance (India), HDFC and HSBC. NBFCs like Sundaram Finance are also members of the bureau.
?It is mandatory for banks to disclose to Cibil minimum information such as default committed by a borrower and the suit filed against him. However, if a bank wants to avail the information available with Cibil, it needs to become a member of the bureau. The membership is optional,? a senior official of RBI said.
According to a recent report of rating agency Crisil, gross NPAs in retail loans, which include personal loan, car loan, home loan and education loan, are set to increase to around 4% by end of March 2009 from 2.7% on March 31, 2007. This is on a retail asset base of Rs 5-5.5 lakh crore across banks, the report stated.
Gross NPAs in home loans are expected to increase to 2.7% in 2008-09 from 2.2% at the end of March 2007. These were 1.8% at March 31, 2005. In car loans, the NPAs may touch 3% against 2.3% as on March 2007, on account of the increasing proportion of used car loans, which have inherently weaker customer profiles.
The report stated that rising operating costs have put pressure on the margins of transport operators, and have resulted in higher delinquencies in the commercial vehicle segment. This may raise gross NPAs to 5.5% from 4% as on March 31, 2007. The bad debts in the unsecured loans, which consist of personal loans and credit card receivables, may be in the range of 12-15% over the medium term, Crisil said.