Indian banks may have an over Rs30,00,00,00,00,000 bad loan storm coming

[Abdullah719]

As if the bad loan crisis at Indian banks wasn’t alarming enough, there is a ticking time bomb that can spark another crisis for the industry.

Loans worth Rs3.5 lakh crore ($48.88 billion) have not been recognised by banks in India as non-performing assets (NPAs) and they run the risk of turning sour, India Ratings, a part of the global ratings agency Fitch, said in a report on Feb. 05.

These loans are still being serviced by borrowers, and categorised as “standard” on banks’ books, the report added. A loan slips into the NPA category if the principal or the interest amount on it is overdue by 90 days or more, till then it remains standard. Apart from the risk of not recovering the loans, banks have to set aside a higher sum for NPAs as provisions that adversely affects business.

“In the worst-case scenario, about half of the unrecognised stressed assets can slip into NPAs in two years from October 2018,” said Jindal Haria, associate director of banking and financial institutions, India Ratings & Research. Of the Rs13.5-14 lakh crore stressed corporate loans, banks have recognised only Rs10 lakh crore as of September 2018, he added.

This will be a big blow for the Indian banks that may have to keep aside an additional sum of up to Rs40,000 crore as provisions for these loans, which may turn toxic.

The NPA nightmare
Indian banks have been sitting on bad loans worth over $150 billion and the clean-up exercise has been a huge challenge for the sector.

This is in contrast to the Reserve Bank of India’s (RBI) latest financial stability report released in December 2018. The gross NPA ratio of banks is expected to decline from 10.8% in September 2018 to 10.3% in March 2019 and 10.2% in September 2019, the central bank had noted, then.

The RBI’s optimism had stemmed from the fact that the quantum of bad loans had decreased between March 2018 and September 2018 for the first time in three years. The gross NPA ratio declined to 10.8% in September 2018 from 11.5% in March 2018.

Public sector banks (PSBs) had been the worst-hit due to this crisis as they accounted for a lion’s share of the toxic loans. The condition was so alarming that at one point, the banking regulator had to put 12 Indian banks under a corrective action framework where they had to face strict operational restriction, while one of them was even barred from lending.

Last month, due to better performance, three out of the 12 banks have managed to come out the framework. Things are unlikely to change drastically for most of the other lenders that are under stress.

“Most large private banks and the two large PSBs (State Bank of India and Bank of Baroda) are adequately poised to benefit from growth opportunities over FY19-FY20 and gain market share at a faster pace…The agency has retained its negative outlook on mid-sized and smaller PSBs with weak capitalisation, relatively lower provisions coverage for identified stressed assets and a larger stock of unrecognised assets across non-corporate segments,” added the report.

In order to pull the PSBs out of this vicious cycle of bad loans, the Narendra Modi government has been pumping in more capital to shore up their position and improve loan growth in the economy. However, it may take a while before the efforts yield significant results.

https://qz.com/india/1543711/indias-sbi-pnb-others-may-face-a-rs3-5lakh-crore-npa-problem/

 

[MenInG]

Looks like a major storm brewing....

 

[BreadPakoda]

Those who have worked in the banking sector always knew this was coming. Banks, especially public sector, have often been used as tools by politicians to help themselves and their friends.

 

[JaDed]

Yup, Rajan tried getting banks to be accountable but lol we know what happened..

 

[Gabbar Singh]

Sometimes it seems that modern day banking is just one big ponzi scheme with various governments just kicking the can down the road and buying themselves another few years before things go sideways.

We as consumers are also to blame given so many of us are addicted to cheap credit in order to fund our lifestyles.

 

[Napa]

At the end of the day, a NPA is just some money one Indian owes to another Indian. It is not external debt.

Recognizing a NPA as a NPA simply results in the balance sheet of a bank experiencing a fall in shareholder's equity. This need not be a big problem if properly managed, and may even be a way to get rid of the weaker banks and make the industry more efficient.

 

[TM Riddle]

Time to write off some more loans for farmers.

 

[Madplayer]

Now after hearing about this potential crisis, people will take their money out of banks and make it a reality.

 

[Napa]

Now after hearing about this potential crisis, people will take their money out of banks and make it a reality.

NPAs of Indian banks are a well known fact for a few decades now. If people take their money out of banks, they still need to put it somewhere else. If people do take their money out of banks (which they anyway won't because bank deposits of public sector banks are guaranteed by RBI) the RBI can reduce reserve requirements for banks leaving their lending capacity unchanged.

Anyway, NPAs of $50 billion isn't too large a sum considering that India's GDP is around $2,600 billion and forex reserves are around $400 billion.

 

[sensible-indian-fan]

Those who have worked in the banking sector always knew this was coming. Banks, especially public sector, have often been used as tools by politicians to help themselves and their friends.

My banker said the same last year.

He literally laughed at the hype behind Mallya and Nirav scams calling them a joke compared to bad loans.

 

[LastManstanding]

NPAs of Indian banks are a well known fact for a few decades now. If people take their money out of banks, they still need to put it somewhere else. If people do take their money out of banks (which they anyway won't because bank deposits of public sector banks are guaranteed by RBI) the RBI can reduce reserve requirements for banks leaving their lending capacity unchanged.

Anyway, NPAs of $50 billion isn't too large a sum considering that India's GDP is around $2,600 billion and forex reserves are around $400 billion.

I think the insured amount is 1 lakh only.

 

[Napa]

I think the insured amount is 1 lakh only.

Thanks for the information. I however don't think the government is going to let a public sector bank go bankrupt and have the depositors suffer losses. Can't remember that ever happening, maybe I am wrong.

 

[Madplayer]

Thanks for the information. I however don't think the government is going to let a public sector bank go bankrupt and have the depositors suffer losses. Can't remember that ever happening, maybe I am wrong.

Economics or banking is not my forte but are you saying government can stop people from withdrawing money from banks?

 

[Napa]

Economics or banking is not my forte but are you saying government can stop people from withdrawing money from banks?

No, I am saying that :

1) the information that Indian banks have huge NPAs has been around for more than a decade, and people haven't withdrawn their money, and that behavior is unlikely to change now.

2) Indian banks pay a healthy interest rate on deposits, so people are unlikely to withdraw their money and hold cash (which earns no interest) for fear that the bank will default (which hasn't happened in many decades, as least not for large public sector banks like SBI, BOI etc.)