A dramatic jump in NPAs, from 7.8% of advances in March 2016 to 9.1% in September, should be a wake-up call for all those who argued that the worst in the NPA cycle was over now that GDP growth was back on track, or because the government was taking sectoral action like increasing minimum import prices for steel or helping reduce the stress in the electricity sector through the UDAY scheme. For public sector banks (PSBs), matters are far worse, and NPAs were as high as 11.8% in September, according to RBI’s latest Financial Stability Report (FSR). If restructured loans are added, total stressed assets for the banking system rose from 11.5% to 12.3% between March and September 2016. The picture gets worse since loans that are overdue between 30 and 60 days (SMA1) and between 61 and 90 days (SMA2) can also become NPAs with increased corporate stress—there is an overlap between SMA loans and restructured loans. Between December 2015 and September 2016, SMA1 and SMA2 loans fell from R6.2 lakh crore to R3.1 lakh crore—the difference was loans that moved to the NPA category. According to the FSR, RBI projects NPAs rising to 10.1% in its baseline scenario by March 2018, and to 11.8% in a severe stress scenario—for PSBs, in the baseline scenario, NPAs are projected to rise from 11.8% in September to 12.5% in March 2017 and then to 12.9% in March 2018.
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Much of this, as Credit Suisse has pointed out earlier, is to be expected despite an economic recovery—that, of course, is also in doubt now. According to Credit Suisse, while aggregate corporate ebitda rose 9% on a y-o-y basis in Q2FY17, it contracted 24% for companies with an interest cover (IC) of less than one. As a result, 40% of corporate debt today, according to Credit Suisse, is with firms with an IC of less than one—and for 38% of this sample, this has been true for the last 12 quarters, suggesting a normal economic recovery is not going to be of much help. In the steel sector, despite the minimum import price regime being extended, stressed companies kept seeing net profits plummet or losses widen—as a result, between Q1FY17 and Q2FY17, the share of debt with stressed firms, defined as those with a debt-to-ebitda of more than 12, rose from 53% in Q1FY17 to 61% in Q2FY17. Similar results are being seen in the power sector despite the UDAY bailout. Since, banks “may remain risk averse in the near future as they clean up their balance sheets and their capital position may remain insufficient to support higher credit growth”, it is critical that this be resolved at the earliest—the problem is obviously more severe for PSBs since they have the most stressed books. The only possible solution is a bad bank which takes over the toxic assets of PSBs and leaves behind a good bank which can freely lend—while the government seemed to be pushing this a year ago, it is no longer being talked of. The solution is not without problems since, with the bad loans off their books, banks can get reckless with lending again. The alternative, though, is that, with PSBs unable to lend fast enough, private banks will take their place—that’s privatisation by stealth, with the government not even benefitting by way of selling off PSB equity.