Tag: banks

Lenders will see bad loans rise by Rs 1.3 lakh crore after the SC lifted the moratorium on classifying overdue loans as non-performing assets, but they may be hiding more skeletons in their books.

The order is positive for lenders as it removes uncertainty on the classification of defaulters. The lifting of the stay on the classification of loans as NPAs will not hurt banks as they have been keeping money aside for this eventuality.

Following the Supreme Court (SC) stay order, banks have not tagged overdue loans as NPAs since August 2020. However, they have been listing such loans as portfolio-level pro-forma NPAs. For example, the actual bad debt for Axis Bank at the end of December 30, 2020, was 4.55% of its total loans while it reported NPAs of 3.44%. For Bank of Baroda the actual NPA was 9.63% but it reported 8.48%. In the case of Canara Bank, the actual NPA was 8.95% and the reported one was 7.46%.

The silver lining is this is just 16% more than the currently recognised NPA level, not any huge rise as modelled by the RBI stress tests.

ICRA estimates

According to ICRA’s estimates, in the absence of the SC’s standstill order, the gross NPAs (GNPAs) of the banks stood at Rs 8.7 lakh crore, or 8.3% of advances. This, as against the reported GNPA of Rs 7.4 lakh crore (7.1%) as on December 31, 2020.

“Hence, in absence of a standstill by the Supreme Court, the GNPAs for the banks would have been higher by Rs 1.3 lakh crore (1.2%) and net NPAs would have been higher by Rs 1 lakh crore (1%)

Economic survey

The Economic Survey 2021 had called for a fresh review of the asset quality of banks once the Covid-19- related regulatory forbearances are withdrawn.

“A clean-up of bank balance sheets is necessary when the forbearance is discontinued. Note that while the 2016 AQR exacerbated the problems in the banking sector, the lesson from the same is not that an AQR should not be conducted,” the Economic Survey said.

“Given the problem of asymmetric information between the regulator and the banks, which gets accentuated during the forbearance regime, an AQR exercise must be conducted immediately after the forbearance is withdrawn,” the survey said.

Forbearance represents emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery, the survey stated. In the past, banks exploited the forbearance window for window-dressing their books and misallocated credit, thereby damaging the quality of investment in the economy.

Citing the example of the global financial crisis of 2008, it said that the forbearance which was announced by the RBI helped borrowers tide over temporary hardships. But the continuance of this even after economic recovery led to unintended consequence in the form of banks window dressing their books and misallocating credit. This in turn damaged the quality of investment in the economy as borrowers who benefitted from the forbearance invested in unviable projects.

Giving examples, the report said the recent events at Yes Bank and Lakshmi Vilas Bank corroborate that the asset quality review did not capture evergreening of loans carried out in ways other than formal restructuring.

“Had the review detected evergreening, the increase in reported NPAs should have been in the initial years of the exercise.”

RBI stress tests

Reserve Bank of India, in its financial stability report in January, had said that if the economic scenario were to worsen into a severe stress scenario, the bad loans could rise to 14.8% of the loans. For public sector banks, the rate could go up to 16.2% under a baseline scenario and 17.8% in a severe stress one.

In 2011 too, banks had started accumulating bad loans after a lending binge between 2004 and 2010, but they did not declare these bad loans as bad immediately. Only after an asset quality review in mid-2015, the banks started recognising them as bad and unearthed a big mountain of NPAs.