According to a report by Credit Rating Agency - ICRA, NPAs of Indian Banks may rise to 3.25-3.75% of total advances against 2.17% reported in March 2009. Giving its rationale on a possible rise in bad loans, ICRA has said a few public sector banks have seen slippages in their recently-restructured loan portfolio despite providing borrowers moratorium on principal payments. Slippage in case of the country’s largest bank, SBI, was Rs 2,621 crore in the nine months between April and December 2009, according to data shared by the bank in its third quarter results.
In addition, ICRA feels that a part of the delinquent agriculture portfolio has not yet been classified as non-performing assets (NPAs) by banks as they are expecting some relaxation from RBI or the government. For instance, SBI, in its third quarter results, did not provide for Rs 1,530-crore farm loan which have turned bad. The bank is awaiting the government’s decision “on request extension of repayment date.”
SBI did not make provision on expectation that the government may extend the one-time settlement scheme for farmers which expired on December 2009. Moreover, poor monsoon and weak agriculture produce this season could lead to pressures on asset quality indicators over the next few quarters, said ICRA.
Bad loans for 43 commercial banks rose in the first nine months to 2.40% from 2.17% in March. The rating agency is of the view that more delinquencies from the restructured portfolio (twice the level of gross NPA in the system) together with the proposed change in the provisioning norms could impact banks’ earning and asset quality. As on June 2009, 4.6% of total advances of PUS banks and 0.81% of private sector banks were restructured.
Besides this, ICRA has also pointed out that public sector banks would require Rs 100,000-crore capital to maintain 12% capital adequacy ratio and show a 20% credit growth. However, ICRA feels that most private banks would be able to maintain CAR at well over 12%, given the accretion of reserves and capital raised in the past.
It may be recalled that this week, SBI chairman OP Bhatt had pointed out that the bank would need capital in excess of Rs 40,000 crore in the next five years while most PSU banks have approached the government for capital under the World Bank scheme which proposes to give $ 2 billion long-term loan to state-owned banks.
The rating agency also expects interest rates to rise in the next few months and this may impact pre-tax profits to the of 10-20%, considering that 30-35% of banks’ bond portfolio is in ‘available for sale’ and ‘held for trading’ category where they are required to provide for depreciation in securities.
It also expects interest margins to improve in the fourth quarter as banks expand their credit book and replace most of their high-cost deposits with low cost funds. A major portion of high-cost deposits would be repriced by March 2010. The negative impact of a rise in CRR and the new method for computing interest rate on savings account could be offset by increase in credit portfolio and hike in lending rates.
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