Monday, January 30, 2017

Is the Indian Banking Industry Heading toward a Crisis?

In the last 2 articles, we understood about the volume of Bad Loans or NPAs that are currently outstanding in the books of our Banks as well as why or how Banksmanaged to delay this declaration so long. Now, that we know we have over 6 lakh crores in Bad Loans, the question that is probably on your mind is – Is our Indian Banking Industry heading toward a crisis?

Hopefully, this article can help you get an answer to this question.

RBI Asks Banks to Make Regulatory Provisions for NPAs


If you remember the previous article about “Why NPAs went up sharply in 2016” I had talked about Banks having to make Regulatory Provisions of 15% of the loan amount for Bad Loans.

This Provision is nothing but liquid cash the Bank has to set aside for security purposes. If a Bank has 100 crores of Bad Loans, it has to keep aside 15 crores for the same. This 15 crores cannot be used for granting new loans. Now, imagine the plight of a Bank like IOB that has about 30,000+ crores in Bad loans. That means they have to set aside 4500 crores which is a lot of money. The same goes for all banks, 100’s of 1000’s of crores has to be set aside by these banks just to meet the Regulatory requirements set forth by RBI.

You may ask me why does RBI Set such rules – Simple: “To Protect Your (Depositor) Interest”. Let me explain a bit more. We all know that banks grant loans using the deposits made by other customers. If a loan defaults, does that mean bank will not repay the deposit done by another customer? Absolutely NOT. It is our hard earned money and the Bank has No Right to refuse payment. By asking Banks to set aside 15% of their NPAs, there is a pool of money that the Bank can use in case those NPA’s become defaults. Instead of impacting customer withdrawals from Deposits, this Regulatory provision money gets used instead. Get the picture?

Do Banks have Enough Money to make these Provisions?


There have been news/rumors floating around in the past few months that the central government would have no choice but to infuse fresh capital to meet these regulatory provisions because most banks did not have enough money to set aside 15% of their NPAs. However, with this Demonetization initiative started in November, Banks have seen an overwhelming amount of money being deposited by customers. Nearly 15 lakh crores worth of cash has entered into the Indian Banking System. That is nearly 3 times as much as the NPAs in total. This should give enough room for the Banks to set aside the requisite Regulatory Provisions without actually failing to meet RBI norms.

I had already talked about this topic in the article on Detailed Impact of Demonetization and want to reiterate that this Demonetization is actually a blessing in disguise for at least the Banks in India because, without this, they would’ve been facing really tough times in 2017.

Outlook for the Indian Banking Sector for 2017 (For People Keen on Investing in Banking Stocks)


I would say that, the outlook for the Banking Sector in India as whole is somewhere between Neutral to Positive. The tough times are actually past us because the bulging NPA numbers have already been declared and thankfully Demonetization has given enough cash for banks to handle the Regulatory Provisions. The profitability of Banks may not be at par with what we have seen in the past years but it wont be bad either. With the Governments push toward a Digitized Economy, banks are expanding and reaching more parts of our country where it never ventured before. This would help increase credit growth to the double digit % range (~10-12%) and boos business numbers as well.

In terms of volumes PSU Banks would probably post impressive figures but I feel that Private Banks will continue to outperform PSU Banks primarily due to superior fundamentals.


What do you think about this article? Do sound off in the comments section.

Friday, January 27, 2017

Why Did NPAs rise so sharply in 2016?

In the previous article we saw that the year 2016 saw a tremendous rise in NPAs across Banks in India and also saw the outstanding NPA’s on a per bank basis. With those numbers in the background, it is obvious that the Banking Industry in India is on the verge of a major crisis. But, the more important question is, Why or How did this happen?

How did this NPA Story Come About?


In just the first 2 quarters of 2016, nearly 2 lakh crores worth of NPAs were declared by banks. The interesting question here is, how come Banks did not disclose these NPA’s all these years and why are they doing it all of a sudden?

The RBI set a target of March 2017 for all Banks to clean up their balance sheets and disclose the actual value of bad loans. So, the banking system that had a tendency of hiding bad loans and show a healthier than real figures to the investors, had to perform a clean-up and slowly start declaring the true picture. Take any bank, they can’t just say in Feb or March of 2017 that 10,000 crores is their NPA while the RBI released this deadline more than a year back - Right?

How did Banks Get Away with Declaring Bad Loans?


When a loan is in a restructured asset category, it isn’t considered a Bad Loan or NPA yet. Banks happily pushed loans at the first sight of trouble into this restructured loans basket and retained them as regular assets. Since the loan isn’t declared an NPA, the very same people could continue to borrow every more from the same banks or other banks because the borrower isn’t tagged as a defaulter yet.

Why Did RBI give this deadline?


NPAs have always been a point of contention between RBI and the Banks in general. If left unattended, the NPAs could potentially drive the Indian Economy into a bottomless pit from which it cannot recover. The RBI withdrew regulatory forbearance on restructured loans, making it mandatory for banks to make provisions on a restructured loan at par with a bad loan. This means, the banks have to set aside 15% of the loan amount as provisions even if the loan is being restructured. Earlier provisions were only required to be made for NPAs.

Previously if a 100 crore loan is not receiving interested payments for 90 days, the banks had two choices – declare 100 crore as an NPA and mark the borrower as a defaulter. This would of course look bad on the banks balance sheet. So, they mark this 100 crore as a “To be Restructured” loan which technically isn’t an NPA yet and hence delayed adding this 100 crores to the NPA bucket. By doing this clever trick, banks kept adding more and more loans into this restructuring model and avoided adding them as NPA. When RBI declared that provisions need to be made even for restructured loans, banks don't have any incentive to keeping loans in the restructuring bucket. Since the loans aren’t earning any interest, they might as well mark them as an NPA and move on.

What Caused this Accumulation of Bad Loans with Banks?


Take Indian overseas bank & UCO as example, nearly 20% of their loans fall in the NPA category. Still, they are functioning well with no one taking any flak for this scenario. Things are going on per usual because they know that when the bank is in trouble, the Government will Bail them out because at the end of the day, the Indian Government owns these PSU Banks – plain and simple.

Most PSU Banks are like the puppets of the ruling government. The Chairmen have no choice but to listen to their bosses in the Government. In order to show quantity, quality gets compromised. PSU Banks have indulged in careless lending and even if they want to scrutinize any application or initiate recovery proceedings against a defaulter, there is political intervention which results in the bank moving the loan into the restructuring bucket.

In one of my earlier articles on the kingfisher Vijay Mallya fiasco, a friend of mine had raised a question about the multiple times the PSU Banks allowed the restructuring of loans taken by Vijay Mallya without any collateral. More importantly, they allowed further loans even though hundreds of crores worth of unpaid loans existed already.

Do you think a private bank would’ve allowed something like this?


When compared to Government Run Banks, Private Banks indulge in a more thorough evaluation or due-diligence before sanctioning a loan. They also monitor borrowers post the loan disbursement much better in comparison to PSU banks. To top it all off, they initiate recovery proceeds when a loan becomes an NPA while PSU banks get pressure to restructure loans instead of marking the borrower as a defaulter.

Have all NPA’s come out already?


I don't think so. NPAs are coming out in truckloads and this scenario will most likely continue in the coming months leading up to the deadline of March 2017.

Some Last Words:

In order for banks to keep aside cash provisions against their bad loans, thousands of crores worth of money would need to be infused into the banking system by the government. As I had mentioned in my earlier article on Demonetization, willingly or not, citizens have deposited nearly 14 lakh crores worth of old notes into the banking system. So, banks have enough cash to meet these provisioning needs but this is more like a temporary fix to a big problem.

Hopefully the RBI and Banks clean up their act and avert a catastrophe that has just been delayed and could happen very quickly unless otherwise…

What do you think about this situation? Please sound off in the comments section.


Disclaimer: All statistics were taken from the internet and the author does not guarantee the accuracy of the same or assume any liability owing to them being incorrect. This is not a politically motivated post and hence please avoid comments supporting or blaming any political party in this blog.

Thursday, January 26, 2017

The NPA Problem in Indian Banks

The Banking industry in India has always been one of the most favoured in our country thanks to solid and stellar numbers declared year after year. But, if you take the last year 2016 and dig a little deeper into the numbers, there is one glaring problem that has come out – Non Performing Assets or NPA’s. In layman terms an NPA refers to a Bad Loan that has defaulted. Would these NPA’s push the Indian Banking Scene into a Major Crisis? That’s what you will find out in this article…

Year 2016 – The Increasing NPAs  


The Banks in India are currently reeling under a lot of pressure. The amount of NPAs on their books is steadily on the rise with 2016 seeing never before seen rise in NPAs. Look at the chart below for the quarterly growth of NPAs from Dec 2013 until June 2016 (Because official statistics for Q3 and Q4 of 2016 are not available on the web yet)

In just the first half of 2016 the NPAs have gone up by around 2 lakh crores. Don’t be surprised, the numbers below are not exaggerations or made up. They are the actual stats released by RBI and as of June 2016 the total outstanding bad loans on the books of Banks in India is more than 6 lakh crores.



If we dig a little deeper and try to understand on a per bank basis, no surprises there either. State Bank of India, the largest bank in our country has about 93,137 crores as NPAs. Though this is a huge number, it translates to around 8% of the total loans granted by SBI. That is a whole lot of bad loans isn’t it?
Even though SBI is the highest in sheer NPA value, the worst in terms of % is Indian Overseas Bank. Even though their total outstanding NPAs is 30,239 crores, it translates to 20.27% of all its loans. This means 1 in 5 rupees given out by IOB as a Loan is an NPA. A very close second is UCO Bank with 21,495 crores in NPA which translates to 18.66% of its loans. In third place is Bank of India with 43,935 crores in NPA which translates to 16% of its loans.

Look at the table below and you will be able to see the bank wise stats in terms of their total loans in rupees, the NPA as well as the % of NPAs.



Bank NameTotal Loans (Crores)NPA (Crores)NPA Ratio %
State Bank of India1193325931377.8%
Punjab National Bank3569585500315.4%
Bank of India2743914393516%
Bank of Baroda2691153560413.23%
Canara Bank311615304809.78%
Indian Overseas Bank1492173023920.2%
Union Bank of India2429352556010.5%
Central Bank of India1857192510713.5%
IDBI Bank Limited2023042172410.7%
UCO Bank1151662149518.66
Allahabad Bank1453281876912.9%
Corporation Bank1427871572611%
Andhra Bank1372281413710.3%
Syndicate Bank167759134758%
Bank of Maharashtra1031481304012.6%
State Bank of Patiala852391136513.33%
United Bank of India707811010414.27%
Dena Bank81114963611.87%
State Bank of Hyderabad11242094368.39%
Indian Bank12217386907.11%
Vijaya Bank9019965897.3%
State Bank of Travancore6827664019.37%
Jammu & Kashmir Bank Ltd.5064047159.31%
State Bank of Bikaner & Jaipur7403345936.2%
Punjab & Sind Bank6313445667.2%
State Bank of Mysore5522843237.8%
IDFC Bank Limited4971430306.09%
Federal Bank Ltd.5940817472.94%
South Indian Bank Ltd.4170516523.96%
Karnataka Bank Ltd.3541213893.9%
IndusInd Bank Ltd.936678619.19%
City Union Bank Ltd.212165552.6%
Tamilnad Mercantile Bank Ltd.223294892.19%
Catholic Syrian Bank Ltd.78594555.8%
DCB Bank Ltd134642311.7%
Bharatiya Mahila Bank Ltd.62730.4%
Disclaimer: All statistics were taken from the internet and the author does not guarantee the accuracy of the same or assume any liability owing to them being incorrect. This is not a politically motivated post and hence please avoid comments supporting or blaming any political party in this blog.


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