NPA in the Indian banking industry

In the past, few years, it has been observed that the Indian banks are incurring huge losses due to the mounting pressure of Non-Performing Asset (NPA loans where the default in payment exceeds 90 days). The rising crisis of NPA gained significance when the former RBI governor urged banks to clean their balance sheets and soon recognise NPA. A phenomenon which was earlier neglected.  

It was due to the clean-up drive, Gross Non-Performing Asset (GNPA) ratio (calculated as GNPA to total loans) was recorded at 9.1% (Sep. 2016) compared to 5.08% (Sep. 2015). The overall stressed advances ratio also accelerated to 12.3% (Sep. 2016) from 11.3% (Sep. 2015). The Indian banks reported a combined GNPA of Rs 5.67 lakh cr ($85 billion) in September 2016.

It is estimated that 87% of the GNPA are with the Public-Sector Banks (PSU). The PSU banks are reporting a higher NPA than private banks due to multiple reasons, this includes priority sector lending for fulfilling social responsibilities on the directions of the government, lack of proper due diligence and political pressures.

Note: Other major PSU banks include Bank of Baroda, Punjab National Bank, Union Bank and Bank of India. Similarly, other major private banks include HDFC, Kotak Mahindra, Axis  and Yes Bank

According to Televisory, NPA impacts profitability, as well as the net worth of the banks and erodes the value of the asset. This was discovered through a study of the co-relation between NPA, credit growth and profitability of multiple public and private sector banks as seen below. The Bank of India (PSU) and ICICI Bank (private) have the highest NPA ratio in their segments respectively and among the list of banks chosen by Televisory. However, Kotak Mahindra and Yes Bank reported a higher credit growth in 2015-16 without much impact on their NPA ratio. This was because the majority of Kotak’s loan portfolio comprised of home loans as well as financial service loans that have a relatively less probability of default. On the other hand, Yes Bank had a well-diversified loan portfolio with a small proportion of its loans to the big corporates, who are facing repayment issues and are the main drivers for huge NPA in the Indian banking sector.

Additionally, larger NPA have led to a higher provisioning, which impacts the bottom line as well as capital and make banks unable to finance new or expansion projects. In the recent turn of events, banks are finding it difficult to raise money through equity or debt as investors are reluctant to invest in a scenario of declining profitability. Although the top five public banks are maintaining their capital adequacy ratio as per Basel III norms, the NPA issue is likely to remain similar in the near term as banks continue to clear up their balance sheets as per the RBI norms. However, this exercise is likely to ensure the strengthening of Indian banking industry in the long term, it may prove to be a huge challenge for banks in the short term. Moreover, recent action of the government such as demonetization has resulted in industry slowdown and may impact credit offtake for the banking sector. In such situation, quite a few public-sector banks are likely to be under pressure to meet the global Basel III capital requirements and the government may need to infuse more money than expected to rescue the Indian public banking industry.

However, the NPA situation may improve if banks commence strict underwriting policies and bring in strong risk management procedures in place. In addition, low-interest rates, good corporate governance and RBI initiative to support the banking system are likely to minimise NPA in the long run. 

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