Banks bare their NPAs as RBI presses clean-up action

Amidst a spike in bad loans and higher provisioning for non-performing assets by state-run banks, banks are now revealing rather than trying to cover up bad assets.

State Bank of India (SBI), the country's top lender, has reported gross NPAs at 5.1 per cent compared with 4.15 per cent in the preceding quarter, while another state-run lender Union Bank of India saw its NPAs zoom to 7.05 per cent from 6.12 per cent in the previous quarter.

However, in absolute terms the gross non-performing asset rose only 20 basis points to 5.10 per cent from 4.90 per cent, while net NPA rose just 9 basis points to 2.89 per cent.

But total provisions rose 31 percent to Rs 8,483 crore from Rs 6,477 crore. Net loan loss provision was up 58.93 percent to Rs 7,645 crore from Rs 4,810 crore.

Punjab National Bank (PNB), the country's second-largest state-run lender, which saw its bad loans rise to 10 per cent of the total loans, also registered a significant fall in its profit.

With NPAs around 10 per cent, PNB and Dena Bank (with gross NPAs of 9.8 per cent of loans), are nearer to regulatory restriction of lending, opening new branches or even recruiting.

"We have to clean up the balance sheets (of banks). They will emerge from the clean up stronger and healthier," Reserve bank governor Raghuram Rajan said at an event in Mumbai on Thursday.

"As we clean up, we have to make sure that this (increase in NPAs) doesn't happen again. Strengthening board and management (of banks) will help loan evaluation and monitoring," Rajan said.

As per banking regulations, RBI can initiate restrictions to discipline the bank whose bad loans cross 10 per cent and capital erodes substantially. RBI had last year placed restrictions on Indian Overseas Bank after its share of bad loans crossed 10 per cent.

At least three other public sector banks, Central Bank of India, Allahabad Bank and Dena Bank, also posted huge losses in the October-December quarter on account of a sharp increase in bad loans.

"Deep surgery needed to clean up balance sheets; NPA recognition is anaesthetic to do surgery," said Rajan.

Banks typically prefer to postpone the problem by technically retaining many NPAs as performing ones to show a good book. But, as Rajan has been cautioning banks, this would result in larger problems in future due to accumulation of bad assets that aren't recognized as bad yet.

To date, the reported gross NPAs of Indian banks stand at around Rs3,00,000 crore, while restructured assets (under CDR and bilateral channels) together would constitute almost double amount. On the whole, the total stressed assets in the banking system would be in 10-12 per cent of the total bank loans given for banks.

Banks typically prefer to postpone the problem by technically retaining many NPAs as performing ones to show a good book. But, as Rajan has been cautioning banks, this would result in larger problems in future due to accumulation of bad assets that aren't recognised as bad yet.

While banks have finally acknowledged the problem, the issue is far from resolved. How to repair such a huge stock of bad assets is a billion dollar question before the industry, the government and the regulator.

Any chances of recovery depend on the revival in the economy itself and how effectively the banking system is equipped with tools to take on crony promoters, who have been using the banking system to their advantage.