NPAs still a worry for banks

NPAs still a worry for banks

The year 2015 has been a mixed bag for the Indian banking industry. Though the stress on assets in the sector continues, there were signs of improvement in stressed assets of public sector lenders.

There were major capital expansion programmes, both in the private and public sectors.
RBI was very proactive this year, giving ‘in-principle’ licences to 11 players in the payment banking sector, as part of its financial inclusion. The apex bank also granted ‘in-principle’ approval to the 10 applicants to set up small finance banks.

Worrisome NPAs
The Indian banking system is under severe stress with rising NPAs and restructured assets. According to the Financial Stability Report released by the RBI this month, the GNPAs of India’s banking system stood at 5.1 per cent. If the restructured assets are added to this, the total stressed assets will come to 11.3 per cent.

“This is an alarming figure with major implications for the health of the financial system and the economy at large,” Geojit BNP Paribas Investment Strategist V K Vijayakumar said. The rising stress in the banking system is already reflected in the market. While the Nifty is down by around 6 per cent so far in 2015, the Bank Nifty is down by 9 per cent. The PSU Bank Index is down by a whopping 30 per cent reflecting the poor health of the PSU banks.

Capital expansion
The rainbow reform ‘Indradanush’ announced by the RBI, promising a capital infusion of Rs 20,000 crore, can provide some relief to PSU banks. But when the economy turns around and the credit demand increases, PSU banks will find it difficult to raise the  capital. Many of them have raised both tier I and tier 2 capital, from the open markets.

PSU banks will certainly lose their market share, going forward. The well-managed private sector banks will succeed in raising their market share at the expense of PSU banks. 

“The Strategic Debt Restructuring initiative announced by the RBI that allows lenders to convert the debt into equity, and thereby affect a change in management, is presently caught up in legal issues. It will take time for this SDR to produce results,” said Vijayakumar.

There were various capital expansion programmes by private lenders too. HDFC Bank has raised around Rs 10,500 crore through simultaneous share sales to institutional investors on Indian and US exchanges.

Payments Banks
In February 2015, RBI released a list of entities that had applied for in-principle, payments bank licences. The external advisory committee of RBI submitted its findings on the validity of applicants on July 6, 2015. Out of 41 applicants, the ‘in-principle’ licences were granted on August 19, 2015, to 11 players that includes Aditya Birla Nuvo and Airtel M Commerce Services among others.

“They (payments banks) will come with high degree of technology, which traditional banks are not in position to provide for,” said A P Hota, MD and CEO of National Payments Corporation of India. He added that even after the Pradhan Mantri Jan Dhan Yojana (PMJDY), banks are still unable to provide services beyond account opening.

The Reserve Bank of India (RBI) granted “in-principle” approval to the following 10 applicants to set up small finance banks under the “Guidelines for Licensing of Small Finance Banks in the private sector” (Guidelines). The list includes Au Financiers, Capital Local Area Bank, Disha Microfin, and Equitas Holdings, among others. Most of the applicants are microfinance institutions having a good track record.

Though the increasing NPAs in the industry is a worrying trend, the government’s initiative of pumping capital into PSUs is a welcome sign for 2016.

“Despite global headwinds, India’s macro fundamentals remain strong. Coordinated monetary, fiscal and industrial policies have positioned the economy for a sustained growth recovery in 2016. The magnitude of investment required will provide significant opportunities for banks,” said Saugata Bhattacharya, Chief Economist, Axis Bank.

“The RBI, therefore, mainly aims at financial inclusion. The inevitable consequence of having more banks will be increasing competition and pressure on the NIMs of banks,” said Vijayakumar.

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