If you are made to believe that ‘farm loan waiver’ is the biggest threat to Indian banks (primarily PSBs) NPA woes, then you may be quite wrong! And if you are thinking that ‘bad bank’ can solve our bank’s woes as it did to Citibank, then again, you may be wrong! There is a strong need to cut the wheat from the chaff and that’s what we aim in this article. It is important because the amount in question runs into lakhs of crores!!! The cover image can give you some estimates as well 🙂
Picture says a thousand words! Hence we will share a few charts and with that we will pen down a few points as well. Believe me, as this will bring a lot of perspective in the noisy NPA discussions we are having nowadays. Our focus is primarily public sector banks and couple of private sector banks as well.
Why the NPA worry is increasing day by day and not dying down?
The reasons are quite obvious when we see the below charts (All figures in INR crores). Salient points that comes out easily!
- In first 3 quarters of FY17, fresh slippages & gross additions to NPA has outperformed the recoveries/ upgrades and whatever the banks could write-off or sell off (to ARCs) by a large margin mostly
- The GNPA remains quite high and can be categorized in 3 buckets. High (5-7%) will have SBI, Axis & ICICI, Very High (~10-11%) will have Union Bank & BOB and Extremely High (14-15%) will include IDBI, CBI, PNB, BOI). It need not be said, that higher the bucket, greater the risks for the bank
- Despite the efforts, banks have not been able to knock off/ sell off stressed assets significantly. For this the ‘Green’ bar will out things in perspective. This also puts into questions whether the concept of ‘Bad Bank’ can work in India effectively. While the banks may be very happy to pass on the assets at a discount but the receiving ‘Bad bank’, the problem will only be shuffled and not addressed. And that will also not ensure that we don’t see a repeat scenario!
- The GNPA % has increased for all banks from FY16 to 9MFY17. Banks such as BOB who has been saying that they ‘will soon see the worst over!’, are seeing more tough days instead! But some people have managed it better! Likes of IDBI, Axis, Union Bank, CBI seems to have been hit badly in Q3 or the preceding FY17 quarters
Corporate is the most badly hit sector. The ‘Sector wise NPA’ graph clearly shows where the problem lies. The NPA %age for this sector has roughly been between 16% – 26%. The challenge with corporate not paying up/ inability to pay simply outplays any other sector. So much for agriculture? Though it is not good at 5-6% but that’s quite a sober number compared to the corporate defaults. Retail seems to be the safest bait!
Note: For SBI, Mid corporate figure has been taken, the same for Large corporate & SME are nearly 9%; for Union Bank, MSME is at 9.25%; while for BOI & CBI banks, Industry sector NPA rate has been considered for below
The impact of the burgeoning NPA problem is 2 fold:
- Capital constraints (and we will come back to this in next point)
- Growth in advances will be hit as banks will be wary of loans and especially corporate loans! That’s where one can see a ‘de-grow’ in mid-corporate sector loan for SBI (most badly hit in SBI) and in general corporate loans for BOI, CBI & Union Bank as well. What is perplexing that after all this; IDBI still seems to betting on corporate! (increase of 5% over 9MFY16)
Capital constraints challenges
- The biggest reason that the GOI & RBI is worried so deeply on the worsening NPA ratios is the direct impact on bank’s capital and more specifically ‘CAR/ capital adequacy norms’! There are 2 broad reasons for the same:
- Capital constraints: NPA directly impacts the CAR requirement for the banks. Higher NPA will mean higher RWA (risk weighted capital) and hence higher Tier1/2 capital required in absolute values.
- Basel III requirements: This is scheduled to go live fully by FY2019 and there are interim goals on Tier1/2 and CAR requirements. Banks will face increasing difficulty in maintaining the same (especially the ones which are in Extremely High category). For PSBs constrained by lack of profits (which can be ploughed back into capital at end of year- reflected in Tier 1 capital as per RBI norm only after year end), this will mean challenges for them to meet more stricter Basel III CAR norms and also means much higher needs of capital infusion requirement from GOI
- In last year, RBI had come out with a few directives on capital recognition norms. The primary reason was to ease the norms, unlock a lot of capital which can be recognized as part of bank’s capital requirement and hence would bolster their CAR. So that means, there are lesser headroom for further easing now and hence either capital infusion by GOI has to be given (this is again constrained by the deficit budget of GOI) or the banks have to act very fast on resolving their NPA challenges
- Due to the combination of all such factors and banks increasing inability to lend further and fright in lending to corporate will also mean drying up of funds for these sector but that is very important for economy to grow. Hence this is double whammy for the GOI as not only capital infusion needed to keep the banks healthy but will also need to be worried on the cascading effect on economy. The RBI Basel III norms/ requirements phase wise is illustrated below (taken from RBI notification)
The key question is ‘who is going to bite the bullet!’ Seems only way that this can work out is for banks, RBI & GOI working in tandem! Following matrix can probably give some perspective!
Individual banks: Annual reports, Q3 Analysts Presentations, FY16 Analysts presentations, and other available financial results/ presentations accessed from the bank’s websites between 20th t0 25th March 2017