George Mathew(With Swarup Chakraborty)

MUMBAI, MAY 10:While the sub-prime crisis — defaults by weak borrowers — is still playing havoc in the US, Indian banks are trying to cope with the explosive growth in lending witnessed in the last one year. Blame it on high interest rates or lack of due diligence, defaulted loans — or non-performing assets (NPAs) in banking parlance — are on the rise. India’s top two commercial banks, State Bank of India (SBI) and ICICI Bank, have reported a big jump in bad loans during the financial year ended March 2008, with the banking sector in general reporting an unusually high number of defaults in the retail segment.

Gross NPAs of ICICI Bank shot up by 72.1 per cent from Rs 4,850 crore to Rs 8,350 crore during the year 2007-08. SBI’s bad loans jumped 28.3 per cent to Rs 12,837 crore during the year. Under the Reserve Bank of India (RBI) rules, when the interest or principal of a bank loan is defaulted for 90 days, it’s classified as a non-performing asset (NPA).

With default levels rising in major banks, gross NPAs of commercial banks are expected to rise from Rs 50,000 crore in March 2007, to over Rs 55,000 crore for the year ended March 2008, top banking sources said. While the increase in gross NPAs of the country’s two largest commercial banks alone stands at Rs 6,300 crore for the 2007-08 period, some state-owned banks like Bank of Maharashtra and Dena Bank have been able to reduce their NPAs since they are not so aggressive on retail lending, sources said. The rise in bad loans in the last year has happened after reduction in NPAs by the banking sector through a host of recovery measures, Securitisation Act, write-offs/provisioning and transfer of bad assets to asset reconstruction companies in the 2003-2005 period.

Admitting that bad loans had risen, RBI governor Y V Reddy said, “we tightened the provisioning norms... we had increased the risk weightage on real estate loans also.” According to a Crisil study, gross NPAs in retail loans are expected to rise to 4 per cent over the next two years from 2.7 per cent as of March 2007. However, the situation will remain manageable, because the less risky mortgage and vehicle loan segments continue to dominate the retail lending portfolio of lenders at 80 per cent of total loans outstanding. Further, rising personal incomes and younger borrower profiles provide cushion in mortgage loans.

“The increase in NPAs is due to the change in our portfolio composition. The unsecured portion as percentage of total loan portfolio is going up. While this segment has credit loss, it has higher income,” said Chanda Kochhar, joint managing director and CFO, ICICI Bank. Unsecured loans of the bank account for about Rs 22,000 crore, or 18 per cent of the total retail loan portfolio of Rs 1,32,311 crore. “The unsecured loan segment generates higher returns and the ratio of losses in the segment are also higher,” she said. According to the bank, the NPAs have risen over the fourth quarter of FY08. “We had already anticipated high NPA numbers. Credit offtake was very good in 2005-06, now it is payback time for retail loan takers and we faced higher number of defaulters. Unlike mortgage loans, unsecured retail loans are extended at a higher interest rate, hence the rate of defaults is also higher than in other segments,” ICICI Bank said.

“The increasing exposure to higher risk customers is mainly through personal loans and credit card receivables. These are unsecured in nature and now form 17 per cent of total outstanding retail loans in March 2007, up from 6 per cent in 2004,” Crisil said. Delinquencies across all retail asset categories have gone up and are likely to further increase in 2008-09. Gross NPAs in housing loans — which constitute over half of the total retail loans in India — increased to 2.2 per cent in March 2007, from 1.8 per cent in 2005; these are expected to increase to 2.7 per cent in financial year 2008-09, Crisil said, adding that car and commercial vehicle asset segments comprise one-third of total retail loans. However, sensing trouble, banks have already slowed down on the retail lending side — the growth in personal loans declined from 30.6 per cent to 13.2 per cent in the last one year, RBI figures reveal.

“Gross NPAs in these segments have increased to 2.3 per cent and 4 per cent as of end March 2007, from 0.9 per cent and 3.2 per cent respectively in 2005. In 2008-09, these numbers are seen at 3 per cent for car loans and 5.5 per cent for commercial vehicles,” Crisil said. However, some public sector banks managed to cut down their NPAs while witnessing a growth in their total revenue. Bank of India’s gross NPA went down from Rs 2,101 crore to Rs 1,931 crore in the last financial year. The bank posted a 79 per cent increase in net profit.

Similarly, Dena Bank’s gross NPA also declined while its income grew by Rs 644 crore. “ There has been a good recovery rate in FY08 due to which we have been able to cut down our NPAs,” said Dena Bank’s executive director Bhaskar Sen. As competition has increased, players in retail lending, in their quest for growth and improvement in profitability are reaching out to hitherto untapped clients, such as the self-employed and borrowers from smaller cities. Crisil said a reasonable definition of ‘sub-prime’, in the Indian context could include small ticket personal loans and a portion of credit card receivables; these loans are typically given to low-income customers.

Going by this definition, ‘sub-prime’ assets in India are still relatively low at 7 per cent of total outstanding retail loans. The rating agency estimates the loss levels in this segment to be currently at 7 to 9 per cent, and expects them to increase to 10 to 13 per cent over the medium term.

editor@expressindia.com

Ads By Google