NPAs: A real life series of Arabian Nights – ET BFSI

Just like the stories forming the series of Arabian Nights came into existence for the survival of the storyteller, the banking sector has been surviving through the looming asset quality stress for nearly half a decade now, through the events of restructuring, bail-outs, concessions, waivers and the latest – moratorium and some life-saving events such as mergers and re-capitalisation.

What started in 2015 with the first asset quality review (AQR) by the RBI, seems to be going through a long haul of remedial process. The industry and all experts have been eagerly awaiting the bottoming-out of the non-performing assets (NPAs) ever since. The idea was to clean the balance sheets and arrive at a fair business that would be free from ambiguity and misreporting of non-payments of loans; but only when the excavation begun did we realize that the mine was far deeper than earlier estimates. And to top that, the repeated explosions only kept digging it deeper.

India’s scheduled commercial banks (SCBs) have witnessed NPAs increasing from 4.8% in 2015 to +8% thereafter and now. As per RBI’s recent Financial Stability Report, India’s SCBs would witness an increase in NPAs to 12.5% under baseline scenario and to 14.7% under very severe stressed scenario by Mar’21 as compared to 8.5% as of Mar’20. These numbers for public, private and foreign banks may increase, in the worst case scenario, to 16.3%, 8.7% and 8.5%, respectively by end Mar’21.The rise in stress would eventually lead to lower capital adequacy ratios. Though RBI indicated that the estimates did not include any mergers or recapitalization which would increase systemic resilience.

The point of contention here is that while the banking sector alone cannot imply the state of Indian Economy or the pace or recovery and growth from current stressful situation; it is certainly a sector which is impacted by all others in form of its advances book and can be looked at with a view to understand the money flows across industries.

As we stand at mid-year FY21, several sectors such as infrastructure and real estate have started showing signs of improvement and some like the FMCG, information technology and pharmaceuticals have shown strong performance.

However, it must be noted that returning to pre-covid levels is just like being able to stand up after one has fallen, but this does not imply growth. For that we must be able to walk past that level and this is going to take a few quarters.

The situation is getting better as compared to Apr-May’20, but it may still be long before we achieve the sub 5% gross NPA levels and be able to focus more on growing the business than on recoveries of past dues. As the world economy goes through deep stress resulting from covid driven loss of businesses and jobs, the return of healthy recoveries is a bit far-fetched.

However, given the gradual business improvement especially in the private sector banks and the improvement in recoveries therein, this sector too shall gain momentum soon provided there are no major surprises. It becomes essential that we do not look at banking sector in totality and understand that public sector banks may take longer time to recover than their private peers.

The private players on the other hand, are set to gain market and achieve growth on the back of strong liability franchise, comparatively lower NPAs, better provisioning coverage and higher recovery rates.

(The blog is authored by Raveendra Balivada, Head of Investment Advisers, HDFC Securities)

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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