With stressed assets ballooning to Rs 733,000 crore (14.34 per cent of advances) during fiscal March 2016, the Ministry of Finance has cautioned public sector banks against lax recovery of bad loans and increasing write-offs.
“The recovery efforts have not matched the exponential growth of gross NPAs. Even within recovery, most of it is coming through write-offs whose percentage is increasing every year,” the ministry told the CEOs of PSU banks. The banks must make special efforts to recover these written-off accounts as these directly impact the bottom line of the banks, it said in a note.
While gross NPAs of PSU banks increased from Rs 2.67 lakh crore to Rs 4.76 lakh crore as on March 2016, recovery efforts of banks have not resulted in a similar increase from last year, it said. “The total recovery done during FY16 by all PSU banks was Rs 1.28 lakh crore against total recovery of Rs 1.27 lakh crore done last year,” it said.
According to the Ministry note, even within this figure, the ratio of written-off assets has increased from 41 per cent to 46 per cent. “Fresh slippages have increased by as much as 118 per cent from Rs 1.78 lakh crore as on March 2015 to Rs 3.90 lakh crore as on March 2016,” it said.
Public sector banks had written off Rs 1,14,000 crore in the last three years, as reported in The Indian Express on February 8, based on a response by the RBI to an RTI application. Banks were planning to write off more bad loans in 2015016, and this could be Rs 52,227 crore, similar to the quantum written off in 2014-15.
Listing three issues for quick resolution, the Ministry note said the operating profits have been overtaken by operating expenses. The whole balance sheet is affected by earnings, income generation which is dependent on business or credit growth. “If income generation does not grow, then banks will be further under pressure as employee cost and administrative costs continue to increase,” it said.
The Ministry’s note said the banks must remain prudent on the quality of credit as corresponding risk weighted assets (RWAs) affect capital ratios. “This is important… banks must make efforts to increase credit to lead income generation without concentration risks i.e. risk should be spread over various sectors and segments.” It said.
“As on date, only 54 per cent of gross NPAs are provided for against the RBI benchmark of 70 per cent. Going forward, if more of stressed assets slip into NPA category, then it will put pressure on margins and will affect both profitability as well as capital adequacy,” the Ministry note said.
PSU banks had to make huge provisions for increased NPAs during the last two quarters of FY16. As a result, during FY16, the PSU banks posted a net loss of Rs 17,991 crore against net profit of Rs 30,869 crore during FY15. Six banks have posted negative credit growth. The year also witnessed an increase in Risk Weighted Assets (RWAs) of PSU banks by 4.27 per cent. At the same time, credit growth was only 4 per cent as against 25 per cent credit growth by private banks.
According to the RBI, too many projects were left weakly monitored, even as costs increased. Banks may have expected the lead bank to exercise adequate due diligence, but this did not always happen. Of course, the unscrupulous among the promoters continued to divert money from the expanded lending, increasing the size of the problem on bank balance sheets. The inefficient loan recovery system then gives promoters tremendous power over lenders. “Not only can they play one lender off against another by threatening to divert payments to the favored bank, they can also refuse to pay unless the lender brings in more money, especially if the lender fears the loan becoming a non-performing asset,” RBI Governor Raghuram Rajan said recently.