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NPA crisis: Why loans to MSME, real state, farmers may go bad

Shritama Bose

The big jump in provisions for loan losses seen in the March quarter suggests the worst of the NPA (non-performing assets) cycle may be over since most lenders appear to have taken care of their exposures to IL&FS and Jet Airways. However, with the economy seeing a very sharp slowdown with demand weakening and some uncertainty on the monsoon, exposure to businesses in sectors such as MSME, real estate, agriculture, power, and even to NBFCs could go bad, say analysts.
The contraction in factory output in March and also the very poor corporate results for Q4FY19 could make it harder for businesses to repay their loans, they point out. Moreover, for the MSME sector, interest costs have not fallen meaningfully as banks have not transmitted the entire reduction in the repo rate to customers. Interest costs for a sample of some 1,000 companies jumped 28% year-on-year, the highest in many quarters. As such, banks asset-quality woes may not yet have ended.

For 22 of the 33 banks that have reported Q4FY19 results so far, a sequential increase has been observed. Apart from provisioning for large legacy non-performing assets (NPAs), which shot up by 100% in some cases, lenders also made contingency provisions to cover potential slippages.

The total provisions for the 22 banks increased 58% between December 2018 and March 2019 to `86,788 crore. The number could turn out to be higher after Punjab National Bank (PNB) and IDBI Bank, which have large exposures to stressed corporates, announce their Q4FY19 results. Several lenders have reported lower gross non-performing loans, this time round by taking write-offs.

At Bank of Baroda (BoB) for instance, the decrease in GNPLs resulted from a sharp increase in write-offs at 6% of loans, the highest levels since FY2010. BoB s provisions rose a whopping 93% q-o-q to `5,399 crore, causing the bank to report a `991-crore loss.


PS Jayakumar, MD and CEO attributed the loss to accelerated provisioning for some accounts and ageing provisions of `900-1,000 crore for the two large NPAs of Bhushan Power and Steel and Alok Industries. We have substantially accelerated the provisions in respect of some telecom exposures that have a large potential for sell-down, Jayakumar added.

Moreover, BoB indicated a watch list of `10,400 crore or 2.2% of loans in Q4FY19, a sequential increase of 30 bps. Again at Union Bank, the higher provisions for bad loans was aimed at bringing down the net NPL ratios. However, the fall in both the gross and net NPLs was lower than the reduction at peer banks.
The steepest surge in provisions was seen at Corporation Bank, where they shot up 1,061% quarter-on-quarter (q-o-q) to `8,768 crore, of which a chunky amount was for companies undergoing the insolvency process. In its notes to accounts, the bank said it has provided an additional `1,012 crore in respect of accounts being resolved under the Insolvency and Bankruptcy Code (IBC) process. Total actual provision made as on 31st March 2019 for the eligible NCLT (List 1 & List 2) accounts is `9,079.56 crore, which represents 100% of provision of the outstanding value as on March 31, 2019, instead of `8,067.57 crore as per IRAC norms, the bank said.

Among private banks, the largest jump in provisions was at Yes Bank, which saw provisions shooting up 272% y-o-y to `5,778 crore for FY19. In Q4, total provisions were to the tune of `3,660 crore, of which `2,100 crore was contingency provisions. Managing director and CEO Ravneet Gill told analysts that the additional cover was in view of the evolving situation of liquidity tightness in the non-banking financial company (NBFC) space. As we know that over the last six-eight months there has been a significant dislocation in the Indian financial services market, stemming from the dislocation in the NBFC space, mutual funds, and then a lot of related issues, which led to significant risk aversion and liquidity became a major concern, Gill told analysts, adding: It definitely had an impact on our credit portfolio as well.

The bank has already recognised an airline account as NPA in Q4, widely believed to be that of Jet Airways. IndusInd Bank, too, saw a substantial reduction in Q4 profit as a result of high provisions against its exposure to Infrastructure Leasing & Financial Services (IL&FS) entities. Provisions rose 157% sequentially to `1,561 crore. Including a `3,000-crore exposure to IL&FS entities, the bank had `6,500 crore worth of bulky stressed exposures.

Analysts at Nomura wrote, This is high for a bank with 60-70 basis points (bps) of credit costs in the past and whose risk profile was until last year often compared to HDFC Bank.

The investment bank has factored in 80-100 bps of credit costs for IndusInd Bank over FY20-21.