Over the last couple of years, public sector banks (PSBs) have seen non-performing assets or bad loans rising steadily. There are several reasons for this, the primary ones being the economic slowdown and several projects remaining stalled.
If the top priority is to get these projects rolling, it is critical to ensure that banks are adequately capitalised to enable meet the credit needs of the economy.
A report by credit rating agency ICRA has projected that the gross non-performing assets (NPAs) of PSBs would rise from the 4.4 per cent of gross loan advances in March to anywhere in the range of 4.7 per cent by the close of the current financial year.
This is up from the 2.09 per cent of gross advances in March 2009. According to the Economic Survey 2014-15, gross NPAs increased over three-fold from March 2010 (Rs 59,972 crore) to March 2014 (Rs 2,04,249 crore).
The Survey has identified the ballooning of bad loans to: a switchover to system-based identification of NPAs (automated classification of accounts based on certain parameters), slowdown of economic growth, and aggressive lending by banks.
While the level of bad loans stand in the range of Rs 2 lakh crore, experts feel that it cannot deteriorate further.
“The NPA issue cannot get worse than what it is. Also, if the capital markets remain supportive then the companies will be able to reduce leverage and get their projects rolling which would reduce stress on banks,” said Ananda Bhoumik, senior director, India Ratings.
The critical factor is getting stalled projects rolling again. The recent decision approving the auction of coal mines is one such step. This will kick-start activity in the mining sector and the domestic availability of coal will make thermal projects viable. Currently, several projects are lying idle for want of assured supplies of coal.
But more steps such as this are required to help companies unlock the investments already done, which will lessen the burden of bad loans for the PSBs.
Apart from mining, the other stressed sectors are infrastructure and iron and steel where projects have been delayed as clearances are stuck with various authorities. While projections point to prospects of GDP growth picking up, the challenge for banks is credit offtake, that has dried up.
For the quarter ended September 30, credit offtake slipped to 9.5 per cent from 15.1 per cent the same month a year ago. However, there are expectations that it may bounce back to 15-16 per cent over the next few quarters.
“As the credit growth picks up, lack of capital with banks will act as constraint as a lot of government banks are not geared up for a 15-16 per cent credit growth,” said Bhoumik adding that while the banks will have to improve on efficiency there may also be the need for fiscal support to help banks lend more.
The ICRA report also pointed out that the PSBs would need to raise sizeable Tier I capital (Rs 4,00,000-4,30,000 crore) during FY15 to FY19 to meet Basel III norms as well as for growth.
“Their inability to raise such large capital could impact their growth as well as market share…. Nevertheless, while the capital requirement for FY15 does not seem to be a big challenge, the real test would start FY16 onwards,” said the report.
Another issue that needs urgent attention is filling up of top positions at PSBs. Currently, there are eight vacancies for chairpersons and MDs, and 14 for executive directors.
While the government has initiated a fresh process for appointing them after having scrapped the earlier process in October, some say that this is critical as it significantly impacts decision making and competitiveness of these banks.