The Supreme Court’s decision on Tuesday to lift the moratorium on the classification of bad loans is likely to see banks classifying more overdue loans as non-performing assets (
NPAs) in the January-March quarter.
The move will lead to an improvement in collection efficiencies as banks can take legal action to recover their dues. It will also bring clarity on the real impact of the pandemic on asset quality.
Banks and non-banking finance companies have reported non-performing assets numbers on a proforma basis for the past two quarters.
The real picture of the banking will be visible from March quarter. We are all keen to see how the December and March quarter goes. Till then the major focus will be to manage the portfolio till March,” said B. Ramesh Babu, MD & CEO, Karur Vysya Bank in an interview with ETBFSI in December.
He added, we are very clear, we don’t want to postpone the problem. If a borrower couldn’t service the loan even pre-covid and its aggravated now, there is no point in restructuring that account. We have decided to bite the bullet and declare that as an NPA.
The real picture of the banking will be visible from March quarter. We are all keen to see how the December and March quarter goes. Till then the major focus will be to manage the portfolio till March.B. Ramesh Babu, MD & CEO, Karur Vysya Bank
As on December 31, banks reported gross NPAs at around Rs 7.4 lakh crore. Following the Supreme Court’s order, banks can now recognise loans worth Rs 1.3 lakh crore as NPAs in January-March, which will raise the tally to Rs 8.7 lakh crore.
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%)
The focus of the many banks is to deal with the current challenges than the growth,
“We had earlier stated that we will keep a pause button on the growth because we were not comfortable with the way the things were panning out,” said, N. Kamakodi, MD & CEO, Citi Union Bank.
We had earlier stated that we will keep a pause button on the growth because we were not comfortable with the way the things were panning out.
N Kamakodi, MD & CEO, City Union Bank
Collection efficiencies
“Post the judgment, we believe that lenders will report actual non-performing assets in January-March, net of write-offs instead of pro forma NPAs, and that the availability of legal recourse, including SARFASEI Act, should improve collection efficiency,” brokerage Emkay Global Financial Services said.
It said that actual recognition of NPAs would lead to margin compression for banks due to the reversal of accrued interest on NPAs.
However, most banks have made provisions on proforma NPAs, which they will be allowed to write back. This will not lead to any large impact on the balance-sheets of most lenders. Also, proforma NPAs are falling, while the provision coverage ratio has improved by an average of 300 basis points to over 70% for private banks and above 65% for public sector banks in the same period.
The proforma numbers
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 proforma 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.
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.
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