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‘Despite decline in gross NPAs, impaired assets of banks at Rs. 16.88 lakh crore’

George Mathew
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Bankers say a substantial portion of the write-off is technical in nature, but they remain outside the NPA books.(Representational Image)

Total impaired assets of the banking sector have remained at Rs 16,88,600 crore, or 15.7 per cent of the total advances of banks, as of December 2019, despite a decline in gross non-performing assets (NPAs) to Rs 910,800 crore, or 9.2 per cent of the advances, according to the latest report from global banking group Credit Suisse.

Impaired assets of banks include both gross NPAs — loans that are due for repayment after 90 days and NPAs written off by lenders. Total write-offs since FY2014 have amounted to Rs 777,800 crore, 7.3 per cent of the total bank advances, as per the data. “System gross NPAs have continued to moderate and are down to 9.2 per cent versus 11.7 per cent in FY18. While part of this has been driven by improved recoveries, a large part continues to be led by increasing write-offs,” it said.

The global banking group has forecast a rise in bad loans in the coming months from the banking sector’s total loan portfolio of around Rs 93,55,900 crore. It said the second wave of slippages was visible in the third quarter as slippages jumped to 1.5 per cent of loans as both corporate slippage (Dewan Housing Finance Corporation) as well as non-corporate (SME and agriculture) saw an increase. Strong recoveries through the Insolvency and Bankruptcy (IBC) route were able to partly offset the slippage, and gross NPA was stable at 9.2 per cent. “Given residual stress (2-3 per cent of loans) as well as stress in the telecom and SME segments, we expect gross NPA to move up,” Credit Suisse said.

Bankers say a substantial portion of the write-off is technical in nature, but they remain outside the NPA books. It is primarily intended at cleansing the balance sheet and achieving taxation efficiency. In ‘Technically Written Off’ accounts, loans are written off from the books at the Head Office, without foregoing the right to recovery. Further, write-offs are generally carried out against accumulated provisions made for such loans. Once recovered, the provisions made for those loans flow back into the profit and loss account of banks, the RBI had said in an explanatory note.

Several experts, however, said it’s difficult to say whether the decline in gross NPAs was due to loan write-offs, saying recoveries could have added to the decline in NPAs. “A part of write-offs in the past gets recovered which can skew the picture. In FY19, for instance, for PSU banks there were write-offs of Rs 1.83 lakh crore but reduction in NPAs was Rs 1.33 lakh crore,” said Madan Sabnavis, chief economist, Care Ratings.

According to banking sources, very little is known about the identity of the borrowers and the amount written off in the case of individual borrowers. While banks claim that the recovery measures continue even after loans are written off, sources said not more than 15-20 per cent is recovered and the write-off figures every year are rising, much faster than recoveries and recapitalisation.

The RBI had told banks that they are required to extinguish all available means of recovery before writing off any account fully or partly. Some banks are resorting to technical write-off of accounts, which reduces incentives to recover. Banks resorting to partial and technical write-offs should not show the remaining part of the loan as standard asset, the RBI had said in an earlier circular to banks.

Meanwhile, gross slippages in the last quarter (December) have moved up across banks and remained elevated at 1-3 per cent of loans.

On loan growth, Credit Suisse said, “With private bank growth down to 12 per cent versus 20 per cent a year ago and PSU bank growth remaining muted at 4 per cent YoY. The slowdown was evident in both corporate as well as retail segments. Given liquidity constraints, as the credit crunch continues, NBFC disbursements are still not growing and growth stayed muted at 7 per cent even as some of the perceived stronger NBFCs saw a pick-up in growth.”

On non-banking financial companies, Credit Suisse said bond spreads for NBFCs have started declining, especially post RBI’s recent policy announcement, with spreads for better-rated NBFCs (AAA rated) declining 15-20 bps. However, spreads for weaker-perceived NBFCs continue to see higher borrowing cost vis-a-vis stronger perceived NBFCs, it said.