As per the analysis of CARE, the rating agency, quality of assets could pose a challenge for bank profitability in the coming quarters, with some borrowers continuing to default on loans even after they are restructured. But the bad loan losses are likely to be compensated by a rise in interest margins as high-cost deposits shrink.
As a one-time measure in 2008, RBI had allowed banks to give troubled borrowers more time to repay without classifying them as defaulters. Borrowers were given more time by restructuring their loan which involved reducing their debt burden through an increase in the repayment period.
As per CARE’s analysis, the total quantum of restructured assets as on December 31, 2009, stood at around Rs 130,000 crore, amounting to around 4% of total advances. Of this, 70% were in the standard advances category.
On bad loans, CARE has estimated the absolute level of gross non-performing assets at Rs 80,000 crore as on December 2009, up 30% over December 2008 levels.
CARE Research has said it expects gross bad loans to reach around 2.8% for 2010-11. However, if 15% of the restructured assets slip into the bad loan category, gross bad loans may rise to 3.5%. Further, from September 2010, RBI has instructed banks to provide for 70% of the total bad loans on their books, popularly trend as provision coverage ratio (PCR).
According to CARE estimates, in the first nine months (till December 09) the PCR of all commercial banks stood at 52.8%, slightly lower than 55.5% a year ago. However, in the same period, the gross bad loan to total advances has risen to 2.42% from 2.18% a year ago.
Care expects that higher credit offtake may show a positive impact on net interest margins (NIM). The NIM of most banks improved on a quarter-on-quarter basis over the September 2008 quarter. Many banks had mobilised huge deposits during the quarter ending December 2008 at rates ranging from 9.5% to 11%.
The impact of these high-cost deposits should wear off in the current quarter.
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