The Indian banking sector, especially the Public sector banks and the largest bank State Bank of India, has been embroiled in this NPA/ Non Performing Asset challenge for quite some time. When Mr. Rajan was still the Governor for RBI, he had asked the banks to recognize the NPA’s under strict guidelines. The result was quarter on quarter, humongous losses that kept piling up the profit & loss book of the bank. While operating profit was decent, the provision & write-offs ensure the P&L looks very bleak. Even last quarter (Dec-16), Axis reported a worse than expected performance due to rising NPA concern, which pulled its balance sheet and the stock price, as well down.
There have been a many discussions on how to resolve this. There is no easy solution in sight. Recovery has been less than expected, there are instances of corporate bigwigs fleeing the country and the banks straddled with assets which no one is ready to buy in auction. The new DG in RBI and a few other intellectuals in banking have been suggesting creation of ‘bad bank’ as an alternate measure to address the NPA issue.
Unfortunately, we will not be jumping to a discussion on a solution. We believe a deeper look into the NPA issue is warranted to understand the complexity/ multiple dimensions involved and then probably we will realize that there is no one single solution to address the same.
Why NPA happens? Because the person/ institution who have taken the bank credit is not able to pay back the same, either for real reasons or he is just being a willful defaulter. The intricacies are many as we will try to unravel a few.
Which sector (retail/ corporate/ agriculture) is the biggest contributor to NPA? Let’s look at 3 major banks, SBI, Axis & HDFC. From the below sector wise distribution of credit & NPA, a few conclusions can be made:
- Priority sector NPA performance has been generally worse than the non-priority sector
- Industry is not only the biggest contributor in credit o/s but also performs the worst in NPA
- Personal Loans/ Retail seems to be the safest bait with a very healthy NPA ratio
Sector wise, is the NPA situation becoming worse or is it improving? For this we will look at FY 15 vs. FY16 figures. A few conclusions we can draw:
- Gross NPA overall has gone worse. Non Priority sector performance has been badly hit
- Both agricultural loans and loans given to industries are seeing deteriorating performance
- While HDFC has been able to contain the overall impact, SBI and also Axis have borne the brunt
Industry specific performance across the 3 banks in discussions, also throws a few interesting insights:
- A few industry sectors, seems to be the culprit, or the worst performer in terms of servicing the loans
- For SBI, Roads & Ports, Iron & Steel, Food Processing, Engineering seems to be the main dragger. These are the outliers even when compared to the high GNPA %age of SBI
- For HDFC, along with the usual folks (Iron & Steel, Roads), agricultural loans, wholesale trade, food & beverage, real estate & property sectors seems to be dragging its loan portfolio down
- Axis bank also sees a similar challenge in Infrastructure (road etc), Trade, Engineering and Professional services
- Interesting to note that, while both Axis bank & HDFC are able to maintain the GNPA for Iron & Steel sector at 2.2-2.3%, SBI hits the roof at 16.89%.
Based on some of these charts and our interim discussion points, we can make a few fair conclusions:
- Banks seems to be at the receiving end of a downturn economy which has impacted quite a few significant industry sectors, incapacitating their ability to service their loan. This is an extraneous factor for the banks. What are the options for the bank here? Stop lending to these sectors? That would create a vicious cycle as that would further throttle the credit availability for these challenging sectors, creating more challenges for them to grow/ overcome the crisis and further denting their ability to pay. This would be detrimental to overall economy as well. Hence banks needs to be more cautious in picking up the right candidates for restructuring, additional credit etc
- Different banks have been hit to different degrees of the above impact. Between HDFC & Axis (both being private banks), HDFC has performed much better. This can mean that HDFC had made better choices on selecting sectors and the players within that while providing loans and also would have managed a better monitoring of these loans. It may also mean better underwriting at the banks end also. For SBI, being a PSU with social & other governmental compulsions, the choices are sometimes reflection of external pressure on the bank to cater to sectors/ players who no one else wants to touch or also compromise of the principles/ underwriting processes.
Now coming to how we can handle this?
Bad bank is a concept of a standalone bank formed to takeover all the bad assets and thus one time cleaning the books of the bank. A few countries (Sweden has been quite successful) have done that under severe conditions (banks failing). It helps to recapitalize the good bank, freeing it to raise money and carrying on its own core business. Two reasons we don’t think this is required. First we have bad NPA situation for a few banks but it is far from the extreme condition under which Sweden applied it. Secondly, it is like pushing the problem under the carpet. The banks will be merrily happy and so what is going to stop them from making the same mistake again (moral hazard)? The success of the bad bank is also not guaranteed especially if it is not given any special power which can give it stronger teeth to recover. Also if it is fairly assumed that bad economic condition has escalated the issue, then knowing that economy goes through cycles, we can expect it to move up in next 2-3 years. That would give the industry a breather to service back their loans….But technically can the bank wait for that time?
Secondly there are willful defaulters. The banks need to be given strong power to address the same effectively. If an organization knows, that they can get away, then more than likely they will like to postpone repayments or use delaying tactics. Also banks needs to improve their processes and collaborate more to weed out ‘bad apples’ that are either repeat defaulters or are known to siphon of money (misuse of fund credits etc). SBI blockchain initiative (Bankchain) is in right direction, though we need to wait to understand the efficacy of the same
Lastly, especially for PSUs, there is a certain level of corruption that is associated with these corporate loans. While the IDBI case is under media scanner recently, last year also saw some CBI cases against ex UBI CMD. They are glaring instances of bank high ranking officials misusing their power in a severely bad bank-industry nexus.
Hence the final words…The GOI needs to work in improving the overall economic sentiment, the industries need to succeed to arrest the downturns in some of the key sectors. Banks have to relook at their processes to plug gaps and improve underwriting. Overall corruption at the industry level and as well at bank level need to be dealt firmly (that would mean giving more teeth to banks to act rapidly & firmly on defaults and also same time stronger internal vigilance of the banks)
So no easy way out…
Banks annual reports
Basel 3 disclosures of respective banks
Featured image (clipart)