In April last year, Axis Bank came out with a 'watch list' of Rs 22,000 crore-plus stressed corporate loans, accounting for 15 per cent advances to companies. The bank, headed by Shikha Sharma, a former ICICI banker, admitted that 60 per cent of these loans would become non-performing assets, or NPAs, in the next two years. To the bank's surprise, half turned into full-blown NPAs by the end of the first year itself, that is, by March 2017. The bank is now staring at further slippages as a bulk (almost 60 per cent) of the remaining loans in the list have been given to the battered power sector. Exposure to other troubled sectors such as steel, oil & gas and cement could create further problems.
Things have turned so bad at the new-generation private sector bank that it now has one of the highest gross NPAs among private sector banks (5.04 per cent). The bank's gross NPAs, at Rs 21,280 crore, are half its revenues for the year. It is not alone. Other private banks, such as ICICI Bank, have also seen a spurt in NPAs in the last few years. The culprit, in most cases, is these banks' lending to core sectors, which have been in deep depression for the past few years. "Anybody (public or private sector bank) who has lent to the infrastructure sector has suffered," says Abizer Diwanji, National Head (Financial Services), EY India.
What is worrying private banks now is the Reserve Bank of India's, or RBI's, move to ensure higher provisioning for even standard assets, or good companies, if they are in stressed sectors. "This will have a direct impact on banks' profitability as they will have to make higher provisioning (from 0.40 per cent to 4 per cent) for even well-paying assets," says a consultant. Diwanji, however, says that the RBI is trying to make banks more resilient. "There is enough (stress) in the system that needs to come out," he says.
The trend of rising NPAs in private sector banks is surprising, as this was conventionally considered an intractable problem only for public sector banks or PSBs - which were solely blamed for having a disproportionate share of total banking sector NPAs. Though, for most PSBs, the gross NPA figure is still more than 8-10 per cent, much higher than that for their private sector counterparts.
Experts say it is not right to say that private sector banks have been lax in lending. They add that it is the global environment that has turned topsy turvy due to excess capacity and over-leveraging. Apart from this, there has been a slowdown in the domestic economy. All this is creating stress on corporate balance sheets and affecting companies' ability to pay banks. "Jaipraksh was a standard asset till a few months ago. The deal (with UltraTech) will be completed soon and the provisioning will be written back in profits," says a private sector banker whose bank had to make NPA provisioning for the company because of the non-completion of the deal.
The bad asset resolution mechanism is also not working as expected. In many cases, the call has to be taken by public sector bank consortium members, and decisions such as haircut and one-time settlement get stuck for months.
For private sector banks, another and more immediate worry is exposure to the telecom sector. The RBI has asked banks to make higher provisioning than the regulatory minimum for standard assets in stressed sectors by June this year. Some private banks have telecom exposure , which is a standard asset. So, even when the asset is good, the banks will be forced to ensure higher provisioning for it, though some private sector banks are already proactive in dealing with loans to such sectors. IDFC Bank, for example, has been ensuring higher provisioning for telecom much before the RBI circular. In 2015/16, ICICI Bank built a contingency fund of `3,600 crore for slippages in sectors such as steel, mining, power and cement. The bank had to utilise the fund in 2016/17.
While private sector banks are proactive, they are also better capitalised than the PSBs and so in a better position to absorb provisioning shocks. RBI Deputy Governor Viral Acharya recently summed it up well when he said that the doubling of stressed assets is a cause of worry for private sector banks, but their ratio of stressed assets to gross advances is far lower and capitalisation levels far higher.
The private sector banks also have a more diversified book than the PSBs. Their retail advances are showing robust growth that can compensate for lower credit offtake in the corporate sector. Axis Bank's corporate book, for example, was stagnant in 2016/17, while retail advances grew 21 per cent. Unlike PSBs, which face constraints while raising capital, private sector banks have been raising huge amounts of capital.
Many say the current experience will stand private banks in good stead as exposure to corporate loans increases in future.