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Rising Bad Loans at Indian Banks
Jul 12, 2017

The Electrosteels Steels Ltd debacle is one more example of the trouble that Indian banks face. In its recent financial stability report, the Reserve Bank of India (RBI) further highlighted the challenges the banking sector faces.

Gross non-performing assets (GNPA) of Indian banks rose from 9.2% in September 2016 to 9.6% in March 2017. GNPA refers to the total value of loans on which interest and principal income has not been received by the bank for more than ninety days. For some banks, the ratio of GNPAs to total lending is more than 20%. This means more than Rs 20 out of every Rs 100 lent is at the risk of not coming back.

The RBI expects the average GNPA ratio to increase to 10.2% by March 2018. It indicated that if macroeconomic conditions worsen, this number could go up.

The report stressed the risks banks face due to their exposure to the infrastructure sector. Any shock to the infrastructure sector could considerably impact the profitability of Indian banks. Banks have begun to reduce lending to the infrastructure sector. Credit to the power sector, which accounts for 50% of the infrastructure sector, fell 3.6% in May. Credit to road sector was down 5.7% in May.

Although cutting lending seems to be a safety measure to protect bank profitability, it is anything but a good sign for the Indian economy. More than half of the stressed loan assets belong to the infrastructure, construction, oil & gas, power, real estate, and telecom sectors. These sectors are normally the pillars for economic growth. If the problem persists, banks will become increasingly reluctant to lend to these sectors. This would hurt India's long-term growth.

Data Source: Economic times, Company Annual Report

This Chart Of The Day was published in The 5 Minute WrapUp - Management Stands by as Lenders Take Over This Company

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