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NPA: Why It Is A Curse on our Economy?

Indian banking system reeled under fresh slippages of more than 2.3 lakh crore in FY1819.  The write offs (including Technical) grossed more than 2 lakh crore while provisions towards NPA stood at nearly 2.6 lakh crore. Compare this with India’s fiscal deficit of 6.35 lakh crore! The comparison is worth a look as 85-90% of this NPA/ write-offs is from PSU sector banks which survives on recapitalization from government from time to time. Since tax is the mainstay of government funds, it is no brainer that it is common people who at the end bears the brunt. The prognosis of the near future isn’t looking great as the economy seems to be slowing down and skeletons keeps tumbling (DHFL, IIFL etc.).

One can also give it a positive spin saying that fresh slippages are nearly 55% lower than FY1718, while provisions are nearly 9% lower. But at the same time, total write-offs were 45% more than FY1718 which possibly is an outcome of worsening economic condition. As the SBI Chairman recently commented that he is looking at ‘Sky & God’ to sail through these turbulent times. That is more an indication of hopelessness arising out of less than effective performance of the bankruptcy process and the slowing of economic growth in India.

Is it all gloom and doom? For this, we will analyze and dig deeper into the NPA numbers and heir details for 20 banks, including private sector banks. Our focus is on banks who have high NPA and hence don’t get surprised to not find HDFC bank in our initial set of analysis.

Overall NPA Performance

The below chart gives a performance comparison of FY1819 vs. FY1718, sorted based on their GNPA% in FY1718.

  1. GNPA % worsened for Yes and IndusInd in private sector and for Allahabad in public sector
  2. GNPA % dropped significantly for United and Oriental (>= 5%). Canara, SBI, BOM have made moderate improvement (>= 3%). Axis and ICICI seems to have controlled the fall as well (had a comparably lower base)
  3. But most of the other banks have registered only a small dip and runs the risk of further slip if economic conditions do not improve

NPA Movement

The next is to analyze what impacted the overall GNPA movement. There are two major components. Fresh slippages which adds to NPA and reductions (recovery, upgradation, write-offs) which reduced overall NPA. The below chart tells how each of the bank scored.

  1. The myth of efficiency and better governance with privatization was largely broken by the likes of ICICI, Aixs and Yes. RBI had to intervene in all these banks. The NPA movement now shows higher slippages for IndusInd, decrease in ‘Reduction’ for Yes, resulting in them hitting higher GNPA%
  2. Good to see United (which had the 2nd worst GNPA% in FY1718) doing much better in FY1819. Likes of SBI has also done well by having healthy reductions and lower fresh slippages
  3. Likes of BOI, Allahabad bank, Indian bank need to pull up their socks

Distilling Reduction

A bank can reduce its NPA either through upgradations, recoveries or write-offs. In general, we look at upgradations in PSU banks with suspect as they may reflect evergreening of loans. Recovery is obviously the best among the lot while write-offs only indicates not only worsening economic condition but also worsening prognosis of those accounts.

  1. Likes of IDBI, CBI, IndusInd, Yes, ICICI have clocked significantly higher contributions from Write-offs.
  2. PNB, Oriental, BOI, SBI, Indian have benefited from better contribution from recoveries

A look sectoral advances comparative

For this we look at the sectoral advances and NPA for SBI and HDFC bank. The later is known for its excellent asset quality, even under stressed conditions.

We compiled for a few top sectors and the same is detailed below. Observations follows!

  1. In same sectors, HDFC bank has been able to keep a low NPA, compared to SBI
  2. HDFC bank has a more spread out portfolio and hence reduced concentration on any specific industry. For example, all these above sectors contribute 45% to overall advances compared to less than 30% for HDFC bank

These two quick observations basically imply that HDFC is able to de-risk exposure by avoiding too much concentration on any particular industry. Also, HDFC bank does much better job in due diligence before advance (choosing the right candidate for loans) and better monitoring post disbursal to ensure prompt recovery. Whether it is SBI or other PSU banks, they obviously suffer from ineffective processes e.g. due diligence before giving loan, monitoring of loans post disbursal, recognizing bad signals early and effort towards recovery and so on. There have been instances in recent years which shows compromised governance as also a factor behind such huge NPAs. For a long time, the PSU banks lived peacefully under the umbrella called “evergreening of loans” but with stricter norms blowing away that umbrella, they look much more vulnerable. There are a few other inherent issues:

  1. What is the incentive/ penalty a PSU bank/ banker faces for loans gone sour or even to recover? Where does the accountability kicks in?
  2. What power does RBI has in pushing reform in PSU banks? In private sector, it can change board or CEO but in PSU banks, it can do neither! It is governed by GoI and hence open to political nexus.
  3. It can’t be business as usual for the PSU banks, but can they bring a change? At top managerial level, there is a constant fear of vigilance while for rest of employees, it is a big cultural change that they are hardly ready to adapt.

In India, where bond market depth is comparatively very low, financing is heavily dependent on banks. Banks are playing safe in advancing credits due to large NPAs & provisions. The same is leading to liquidity crunch for NBFC and the industries as well. Banks are also not lowering rates significantly despite RBI push as their P&L is still under stress. The industries are under double whammy as cost of funds has not gone down drastically and consumer demands are also muted. Unless demand improves, the industries (esp. SME/ MSMEs) will be under stress to service their loans which may lead to fresh slippages. This is a destructive loop unless someone breaks it. The best one to do that under such circumstances is the government. While RBI may lower rates in their Aug monetary policy meet, it may not be enough at this point. The economy will need big investment push and incentives for consumers to spend (either lowering of taxes, quick resolution on payscale revisions for banks, gov employees etc.). Government seems to be taking strong steps against willful defaulters, but such processes will take time despite best efforts. Government also needs to intervene to bring some cheer to the economy as otherwise there will be industries who may end up defaulting because of their inability to service loans. That will not only bring despair to the banks but also to the industry participants which may pull down the economy further!

Source: Annual reports of individual banks. The data at start is based on the 20 banks analyzed.

Disclaimer: The representations made in any article are the personal views of the author and not of any organization/ company. The article and the views are made in his personal capacity

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