Banks are bracing for higher loan losses in the coming months as slower industrial growth and flagging demand hurt borrowers, particularly small and mid-sized companies. Among the sectors bankers expect would see an increase in non-performing loans (NPLs) are textiles, gems and jewellery, steel and construction. Other exposures vulnerable to delinquencies seem to include new power projects and new telecom players. Crisil estimates that the gross non-performing assets ratio of banks will increase to 3% by March 2012 from 2.3% at the end of March 2011.
?There is certainly some amount of stress in the SME sector and it?s possible NPLs could go up,? confirms A Krishna Kumar, MD, State Bank of India (SBI). While the situation today, even in an increasingly slowing economy, isn?t alarming, bankers are concerned about delinquencies rising in the event that growth does not pick up. As MD Mallya, CMD, Bank of Baroda, points out, ?Slippages are likely in sectors like steel where availability of ore is an issue, mainly for smaller companies. Moreover, we are seeing signs of stress in SMEs in sectors like leather and jewellery.? Smaller steel units account for about an estimated 40% of the total exposure to the sector of R1.7 lakh crore.
While the prevailing high interest rates primarily hurt small corporates, Mallya believes that it could also result in some slippages in the home loan segment. ?Although we are increasing the tenure of the loan rather than increasing EMIs, there is a limit to which we can do so and sooner or latter, customers will feel the pinch,? he says. SBI?s Krishna Kumar says there are several instances of companies not drawing down loans that have been sanctioned in the hope of negotiating a lower interest rate. Construction activity, he points out, has been badly disrupted in regions like Telangana and hence, customers in the region with home loans could be in trouble.
While the slowing economy would hurt smaller companies harder, banks? exposure to the power sector ? R2.9 lakh crore and accounting for just under 8% of total assets ? has been worrying analysts for some time now. Poor finances at state electricity boards and the fact that merchant power tariffs aren?t at anticipated levels, could be a problem, they say. All in all, loan losses are set to go up. In a recent report, Bank of America-Merrill Lynch said it expected the onset of a new NPL cycle by the end of the year, led in part by SMEs and mid-size corporates. ?Further, we expect around 3.5% of sector loans to be restructured, primarily led by power, roads and parts of manufacturing projects,? the report noted.
Analysts observe that although total stressed assets will not be rise anywhere close to the levels seen in the previous cycle, given that corporate leverage remains in control, and debt recovery laws too are in place, they believe
NPLs would go up both this year and in 2012-13. ?We expect NPLs to grow sharply by 41% in 2011-12 and 29% in 2012-13,? says a Standard Chartered report. The report points out that NPLs grew 22% per annum over 2008-2011 for all banks, while those for state-owned banks were up 40%.