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Loans to SMEs and homes near trouble zone By Sumit Kumar, Section Loans & Finances
When the economy is slowing and profits are slumping, can sticky loans be far behind?
The country's banking industry is set to witness a big rise in non-performing assets (NPA) - which means loans on which payments go missing because India Inc's 30 per cent decline in net profits in the July-September quarter signals an imminent rise in default rates, say industry insiders. Bankers told Hindustan Times that they began to see default rates inching up from September. "We are yet to see the worst. Corporates have shown signs of non-repayment and though a clear picture is yet to emerge, the going may become tougher for banks in the next few months," said a senior official at a private sector bank. The total number of loss-making firms has also increased by about 30 per cent in the second quarter of the current fiscal as compared to the previous fiscal. At present, the NPA level is about net 1-1.5 per cent - which means less than one in 50 loans or equivalent in loan amount fail to be repaid beyond a defined acceptable level of defaults. An account is classified as NPA if the repayment process of the outstanding amount does not start within 90 days. In the last couple of years, banks public and private - have been able to reduce their level of bad assets due to robust recoveries. "Howevel: recoveries will be dismal with corporates registering their worst performance in a long time," another banker said. A large number of small exporters have already started defaulting after they suffered a loss of over Rs 2,000 crore on account of the collapse of the forex derivative market. Banks have been directed by the Reserve Bank of India to transfer the bad assets into a separate account and carry on with lending. Banks have indicated that they will not stop lending. INDIA'S BANKS are accumulating bad and doubtful loans at a faster pace as the economy slows, and the trend may accelerate next year as small and medium enterprises, or SMEs, and households struggle to pay debts, bankers and economists say. A Mint analysis shows that in the quarter ended September 30, the combined gross non-performing assets (NPAs) at the top 10 banks by market capital rose 7 per cent from the preceding quarter to Rs 35,290 crore. The pace quickened from a quarter-onquarter rise of 1.25% to Rs 32,982 crore in the preceding three months. Year-on-year, the gross NPAs at State Bank of India, ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank and Union Bank of India shot up 14.5 per cent. Click on "Full Story" for more...
Loans on which no principal or interest has been paid for at least 90 days are classified as non-performing under Indian banking rules. Gross NPAs include loans against which banks have set aside money to cover the risk of default.
Of these 10 lenders, gross NPAs in public-sector banks - which have relatively less exposure to unsecured loans - rose 4.8 per cent in the July-September quarter over the previous quarter, compared with a 11 per cent rise among private-sector counterparts. India's growth is slowing under the impact of the global financial turmoil, prompting a cut in growth forecasts. Bank NPAs will likely increase as a fallout of higher borrowing costs and the liquidity crisis that the cen- tral bank has been battling. Banks have been tightening lending to SMEs and consumers seen to be the most vulnerable. "This usually happens in any economy that grows at 9% and then slows down," said Jahangir Aziz, chief economist at financial services firm JPMorgan Chase and Co."But the question remainsare our banks prepared for it as for the past four years they have been watching the growth in the economy?" Private-sector banks, which have greater exposure to non-collateralised loans such as personal loans and credit-card lending, are at greater risk of being hit by consumer defaults, analysts say At ICICI Bank, India's largest private sector tender, gross NPAs rose to Rs 9,501 crore in the quarter ended September from Rs 8,511 crore in the June quarter At HDFC Bank, it jumped to Rs1,675 crore from Rs 1,502 crore. "We are not seeing any significant deterioration in NPAs," an ICICI Bank spokesperson said. A Mint analysis of 38 listed banks shows that their total gross NPAs rose by around 3 per cent in the quarter ended September 30, compared with 1 per cent in the previous quarter. Until this year's crisis dawned, India's banks had been reducing NPAs by using profits they earned during the boom years to write off bad loans and boost provisions. A senior Union Bank of India official who didn't want to be named said banks needed to strengthen monitoring of their loan portfoilio to check a rise in bad debts, and could not just shut off credit taps. "Credit flow is needed which can support the system at this critical time," this official said. Source: Hindustan Times, November-13-2008
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