The slippages tend to mars bank's profitability, but the tide seems to be turning with sharp reduction in SMA-2 cases and better NPA recovery prospects.
As much as Rs 5 trillion of bank loans have deteriorated into non-performing assets (NPAs) in fiscal 2018, taking the total slippages in the past three fiscals to Rs 13 trillion.
About a fifth of the slippages last fiscal was due to withdrawal of various structuring schemes by the Reserve Bank of India (RBI) in February 2018, after the Insolvency and Bankruptcy Code (IBC) process came into force. As a result, gross NPAs increased to approximately Rs 10 trillion, or approximately 11.2 per cent of advances, as on 31 March 2018, compared with Rs 8 trillion, or approximately 9.5 per cent of advances, as on 31 March 2017.
However, the tide is slowly turning and CRISIL expects moderation in slippages, better recoveries from NPAs, and improved provision coverage to bode well for banks. For example, SMA-2 (or special mention account cases, where exposures are overdue by 60-90 days), have more than halved to approximately 0.8 per cent of advances as of last fiscal-end, compared with approximately 2 per cent a year before, indicating considerable reduction in stressed loans that can potentially regress into NPAs. Adds Krishnan Sitaraman, Senior Director, CRISIL Ratings, Further, prospects of recovery from stressed accounts referred to the National Company Law Tribunal (NCLT) are improving. More than a quarter of the Rs 3 trillion worth of cases referred to NCLT for resolution are from the steel sector, which has seen heightened bidding interest due to improving prospects.
Consequently, CRISIL expects gross NPAs in the banking system to peak at around 11.5 per cent this fiscal and then start reducing. Last fiscal, the banking system reported net loss of approximately Rs 400 billion because of the sharp rise in NPAs and the resulting increase in provisioning costs. PSBs bore the brunt of this with their provisioning costs nearly twice pre-provisioning operating profits, which resulted in a net loss of approximately Rs 850 billion.
According to Rama Patel, Director, CRISIL Ratings, The good part is that the banking system's provisioning cover (excluding write-offs) for NPAs increased to 50 per cent as on 31 March 2018, compared with approximately 45 per cent a year back, and this is expected to improve further this fiscal.
However, higher provisioning and the resultant losses have materially eroded the Rs 1 trillion of capital raised by PSBs in the last fiscal, of which Rs 900 billion from the government. PSBs remain highly dependent on the government for the capital to meet Basel III norms. Given the higher-than-expected losses last fiscal, probable loss in the current fiscal, and recall of the Additional Tier 1 instruments by a few PSBs, the Rs 2 trillion recapitalisation programme announced in October 2017 may be insufficient to meet the capital requirements of PSBs by the end of this fiscal.