Banking NPAs

Is the strong medicine the right strategy?

The sharp correction in the markets on Thursday was largely driven by the massive provision of Rs.20,600 crore made by SBI towards bad loans. It is not just about SBI. Every PSU bank has seen its profits slip or have moved into losses due to aggressive NPL write-offs. The RBI has already given banks a deadline of March 2017 to clean up their balance sheets. Massive write-offs in this quarter, therefore, were inevitable. The question is whether the strong medicine administered by the RBI on banks is actually justified? In fact, it is!

Forces banks to be accountable…

 For long NPA was a problem everyone knew existed but nobody really was providing for it aggressively. This quarter, the RBI has started a new exercise called the Asset Quality Review (AQR) which has evaluated loan portfolios with a fine-toothed comb and forced banks to make provisions wherever warranted. That explains why the provisions across PSU banks were so aggressive in this quarter.

Throwing light on the real case…

For long, banks have used a variety of legitimate means to avoid showing the real extent of non-performing loans in their books. Rolling over loans before it became an NPA or extending fresh loans to refinance bad loans were common practice. Then came the 5:25-scheme for the infrastructure sector! This virtually permitted the banks to extend the outstanding loans to the infrastructure sector by 25 years in 5 tranches of 5 years each. This was again instrumental in postponing the NPA recognition problem. The RBI was worried, and rightly so, that in the confusion over restructured loans, 5:25 loans and CDR cases, the real picture of NPL was actually getting lost. The AQR has actually helped banks pinpoint their exact quantum of problem loans and make a provision for the same. As Rajan rightly put it, “It was a case of deep surgery that was long called for”.

Now, start off on a clean slate…

The good news is that these aggressive write-offs will actually enable banks to focus on growing their books. That has almost come to a halt. Once the bad loans are written off, there is a clearer picture of how much capital would each of these banks require to meet their Basel III deadline by 2019. Today the opaque NPL position was making it difficult for banks to raise money in the markets. These banks can start off on a clean slate and hit the markets with a less toxic balance sheet.

PSU banks require about Rs.180,000 crore of capital infusion in the next 4 years to meet Basel III norms. While the government will infuse Rs.70,000 crore, the balance will have to be raised by the banks from the capital markets. PSU banks are well positioned for that! ©

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