Banks to suffer high NPA ratios, says study

Domestic banks have suffered a high ratio of non-performing assets (NPAs) on account of aggressive lending to the agriculture sector as well as exposure to high sector, said a latest report by Emkay research.

Emkay Global Financial Services’ economist and strategist Dhananjay Sinha said, “Overall, the peak of the NPA cycle for the Indian banking sector is still some time away.  Still, we expect gross NPA growth to average around 40 per cent in the coming couple of years compared to the 30 per cent seen during financial year 2009 to financial year 2012 due to a combination of factors including agricultural lending and industrial credit.”

Sinha, who is also Emkay Global Financial’s co-head institutional research citing the report did not rule out gross NPA ratio rising from the 3.1 per cent in FY12 to 4-6.5 in the next 12-24 months. It (the report) attributed it to factors like dominance of long-term lending rates and exposure to high risk sectors.

Rising NPA have also reflected a weakening in macro conditions. “The linkage of the macroeconomic conditions to the elevated leveraging in the banking system is embodied in multiple variables including decline in domestic saving rate (public, household and private), impairment of productivity growth due to persistently high inflation, commodity prices & revenue deficit and decline potential GDP growth,” the report said.

Emkay is not the only firm to express these concerns. Few others like Motilal Oswal Financial Services recently released a report which said that higher stress on asset quality led to sharp increase in gross NPAs and net NPAs for most state-owned banks. It had mentioned that the agriculture segment remains a high stress area for state-owned banks.

That report had stated that gross NPAs in the agriculture segment increased across banks, with the sharpest increase seen for Union Bank and State Bank of India.