Rising defaults in retail loans add to banks’ bad assets

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.