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Good, bad and ugly
The third quarter results of fy 2016 of many banks are not very satisfactory. There is an increase in the gross NPA ratios. As a result some of them could not control the shrinkage of their bottom lines, as they are required to make additional provisions for their stressed assets.

During the quarter ended December 2015, there has been an increase in the bad loans of over 60 per cent, which was partly due to the re-classification of certain loan accounts in accordance with the Reserve Bank of India’s classification. Banks were advised by the RBI to recognise deferred tax liability in respect of the difference in valuation of held-to-maturity securities between accounting income and taxable income.

The deterioration of the asset quality continues to be a cause of concern. “While adverse economic conditions and other factors related to certain specific sectors played a key role in asset quality deterioration, one of the possible inferences could be that banks extended disproportionately high levels of credit to corporate entities and promoters who had much less ‘skin in the game’ during the boom period,” the RBI report  has said.

While the overall trend is an increase in the gross NPA ratios, there are a few cases of some banks controlling the expansion in their stressed assets. So far so good. Private sector banks, at least some of them, appear to be in this group.


Bulging bad advances


The increase in gross non-performing assets and the restructured standard advances together have raised the stressed asset ratio above 10.9 per cent. Bank advances amounting to Rs.7.05 lakh crore are in the stressed category as against Rs.5.91 lakh crore last year. Among the banks, public sector banks, which account for the largest share of total advances, carry heavier burden of non-performing assets. Their gross NPA ratio has crossed the level of 5.17 per cent while the stressed assets ratio stood at 13.2 per cent. In September 2015 the volume of NPAs of the public sector banks was Rs.2.05 lakh crore.

Of late, the Asset Reconstruction Corporations are finding it difficult to take over the non-performing assets of banks to relieve them of the stressed assets. Many banks have started taking up this task by advertising the availability of houses, commercial buildings, vehicles and plant and machineries in different towns for sale. No authentic reports regarding the progress made in this direction are readily available. The success made by banks may not be sizeable.

Coupled with the increase in NPAs and the interest rate cut by the RBI in September 2015, many banks have reduced their base rates, though marginally. This has reduced to some extent their net interest income as well as the net interest margin during this quarter, adversely affecting their bottom lines.

And the ugly advances

The Standing Committee of the Parliament on Finance is reported to have strongly expressed its concern, particularly relating to the wilful defaulters’ share in the bad advances. It is estimated that the wilful defaulters owe to the public sector banks Rs.64,335 crore, which constitute about 21 per cent of the total NPAs. Considering this deplorable situation, the Committee has asserted that there is no justification in keeping the names of such borrowers secret. Going further, it has suggested banks to undertake forensic audit of such bad advances. The Reserve Bank of India is required to formulate guidelines for this exercise.

Corporate Debt Restructuring procedure has failed to make any notable impact on reducing the NPAs so far. The Committee has suggested that banks must be empowered to take control of the companies in which debt could not be restructured over a reasonable period of time. Instead of waiting endlessly, a time limit of six months should be fixed and beyond which no concession need be given. The larger sick units appear to be transferring their sickness to the lending banks. This has to be curtailed by taking timely action to change the management of such companies.

RBI has recently announced March 2017 as the deadline for banks to clean up their balance sheets which are plagued by high incidence of bad assets.

This would be certainly a difficult task for the banks to achieve during the short span of about 14 months.

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