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Banks: NPAs under control? - Views on News from Equitymaster
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  • Nov 18, 2003

    Banks: NPAs under control?

    The Reserve Bank Of India (RBI) report on the trends and progress of the banking sector in India has thrown up some interesting numbers with respect to the NPA position of banks in the country. The overall picture seems encouraging with gross NPAs (as a percentage of gross advances) falling to 8.8% in FY03 (10.4% in FY02) and net NPAs (as a percentage of net advances) falling to 4.4% (5.5% in FY02). However, if one were to look into the finer details, the picture is even more encouraging.

    While both gross as well as net NPAs have declined, incremental NPA additions has also declined for all the classes of banks. Upgradation, restructuring and recovery of assets, write-offs, as well as disbursal of loans with strong checks (like credit worthiness) are some of the measures due to which gross NPA additions have shown some restraint. As seen from the table below, public sector banks have managed to strongly bring their incremental gross NPAs under control. In case of PSU banks, this may have been largely on account of restructuring well as recovery of assets.

    Bank Group Incremental Gross NPAs Incremental Net NPAs
      2001-02 2002-03 2001-02 2002-03
    Scheduled Commercial Banks 7,120 -2,147 3,093 -2,790
    Public Sector Banks 1,801 -2,387 -19 -2,995
    Nationalised Banks 2,681 119 468 -1,822
    State Bank Group -880 -2,506 -487 -1,173
    Old Private Sector Banks 505 -283 243 -272
    New Private Sector Banks 5,195 421 2,734 479
    Foreign Banks -380 103 135 -2

    Source : RBI

    The numbers of the SBI group are even stronger with a decline in the incremental gross NPAs in FY02 as well as FY03. As mentioned earlier, this may be primarily on account of upgradation and recovery of assets. In case of public sector banks and State Bank Of India (SBI) group that had a large exposure to the steel and textile industries, the restructuring of loans for these sectors seem to be instrumental in the fall in the gross NPA levels in FY03. Also, with the enactment of the Securitisation Act the recovery process has become speedy and the borrowers are seemingly more compliant of the rules.

    The private sector banks too seem to have done well to keep their incremental NPAs under check. While the additions of gross NPAs in FY02 may look rather large, this is largely on account of the merger between ICICI and ICICI Bank. As far as the incremental net NPAs are concerned there has been a significant reduction in the same for almost all the bank groups. This is largely on account of large provisioning made by all the banks in FY03. For public sector banks, the provisioning rose significantly as they booked large gains from their G-Sec investment portfolios. Only the new private sector banks stand out in this respect as the net NPA levels actually rose in FY03, but as a percentage to their advances NPAs actually fell YoY.

    Thus, we see that Indian banks have managed well to keep the NPA levels under check. We can also see that the Indian banks, especially the public sector banks, are employing stricter norms for credit appraisal to disburse loans. This has also led to the fall in NPA levels. However, as the Indian banking sector is slowly discovering the growth potential of the retail segment, investors need to carefully evaluate the strategies of banks for the retail segment. This is because the experience of most Indian banks, especially the public sectors banks, is limited in the retail segment and investors need to be cautious regarding any potential negative surprises on the NPA front in the long run.



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