Even though market sentiment seems to have improved, lenders with major exposures to infrastructure continue to face problems with sticky loans. In fact, the central bank’s insistence on tougher norms has led to banks declaring a huge increase in stressed and non-performing assets (NPAs) over the past two quarters.
By March 31, 2016, banks had declared over Rs 5.8 trillion in NPAs, with public sector banks (PSBs) holding over 90 per cent of the bad loans. This was roughly 11 per cent of the total outstanding credit. With a 93 per cent rise, this represented a more or less doubling of NPAs over the 2014-15 levels of Rs 3 trillion, which was already a very high level of gross NPAs. After provisioning, net NPAs of Rs 3.392 trillion remained uncovered – losses that were more than double the 2014-15 net NPA level of Rs 1.67 trillion. These losses (net NPAs) will have to be met from equity and reserves and could wipe out the net worth of the worst-affected banks.
The pain might not be over. Rating agency CRISIL, expects that “weak assets” could rise to Rs 7.1 trillion by March 2017. As many as 14 banks suffered losses in 2015-16 and the rating agency downgraded nine of them to negative in the January-March 2016 quarter.
Many PSBs may require recapitalisation since they could find it hard to meet more stringent capital adequacy norms for Basel III. In that case, the government will probably have to raise the money since it may not be politically acceptable to dilute government stake at the current low valuations. Of course, the positive side to this exercise is that it could result in much cleaner balance sheets and investors would have a better sense of the health of the banking sector.
One of the noticeable outcomes of this “Asset Quality Review” as it has been termed, is that banks have become more cautious about lending to the infrastructure sector since this is one of the areas of high stress. As the Reserve Bank of India has clamped down, banks have reduced their infrastructure exposures.
If we look at outstanding exposures to infrastructure and related areas, it is noticeable that credit to infrastructure overall has flattened and exposures have been in reduced power and telecom. This is largely because banks that have significant NPAs in these sectors are seeking to get out of trouble. Also, banks have hit prudential lending limits and are apprehensive since they have moved towards the marginal cost-based lending rate (MCLR) system and that puts more pressure on margins.
Several possible developments could help banks recover their cash. There is the strategic restructuring scheme and the 5/25 scheme where loans in infrastructure can be amortised over a longer period with periodic refinancing. The restructuring norms have been tinkered with, to allow banks to recategorise sticky loans. By placing stressed loans in two categories, banks can convert what is considered non-recoverable debt into equity and even take over the company and sell it. It remains to be seen if this helps, although several banks have initiated such strategic restructuring.
However, beyond all the financial engineering, there is the hard reality that assets have to generate some sort of threshold income for debt to be serviceable. Some proportion of the NPAs is stuck in stalled projects and generating nothing at all; some of it is stuck in businesses which started with optimistic projections. Notably, the road sector saw many bids being made at highly optimistic projections and that has just been money down the drain. Telecom has seen a multiplication of costs due to a long chain of events starting with the cancellation of 2G licences. Power sector tariffs are still not remunerative and discoms are run on uneconomic lines due to political considerations.
A brief look at the largest and worst-affected banks could help us understand how knotty the problem is…
Axis Bank has around 7.5 per cent of its assets in the infrastructure space, with 5.8 per cent of these in the power sector. But about 19.2 per cent of its gross NPAs and about 26 per cent of net NPAs are in infrastructure. Clearly the hit to the balance sheet from this specific space is disproportionately high. In addition, the bank released a watch list of loans that it considers likely to face future stress. This list consists of a pool of Rs 226 billion oustanding with a heavy preponderance of power sector and iron and steel industry assets. However, the overall NPAs do not seem too high, with gross NPAs being around 1.6 per cent of advances.
Bank of Baroda
Bank of Baroda has large outstanding NPAs to advances. The gross NPAs plus restructured loans amount to as much as 13.4 per cent of advances while net NPAs plus restructured loans amount to 8.2 per cent of advances. The gross NPA ratio is 9.9 per cent while the net NPA ratio is 5.1 per cent.
Taking infrastructure and construction together, more than 11 per cent of advances come from these sectors. However, the bank claims that slippages are easing off and the NPA ratio is stabilising. It has seen a fall in deposits and has registered losses. Further, it reduced its overall infrastructure exposures to 11.7 per cent of advances in 2015-16 versus 12.12 per cent of advances in 2014-15.
ICICI Bank made sombre projections. The bank has taken out an excess contingency reserve provision of Rs 36 billion in addition to requirements. It expects the environment to remain challenging and for NPAs to stay on the high side. The net NPA ratio was 2.67 per cent of total exposures as of March 31, 2016, while the gross NPA ratio was at 5.21 per cent. The bank reduced net restructured loans to Rs 85.73 billion and it has already initiated strategic debt restructuring (SDR) for loans aggregating about Rs 12 billion. The bank has outstanding SDR loans of about Rs 29.33 billion and it is considering SDR for another Rs 5 billion of loans.
ICICI Bank stated that borrowers in sectors like iron and steel, mining, power, rigs and cement are the worst affected by the weak economic environment. And all these sectors are infrastructure related. Cement and iron and steel offtake have a direct relationship with construction, which is, in turn, directly driven by infrastructure.
Punjab National Bank
Punjab National Bank has a major exposure to infrastructure and related areas. It also has a very high NPA to assets ratio. PNB’s gross NPAs to assets ratio equals 12.9 per cent while its net NPAs to assets ratio equals 8.61 per cent. The bank reduced its exposure to infrastructure from 18 per cent of non-food credit in 2014-15 to 14.7 per cent of non-food credit in 2015-16.
It suffered net losses of Rs 39.7 billion in 2015-16 versus a net profit of Rs 30.6 billion in 2014-15. Provision for NPAs swelled to Rs 184 billion in 2015-16 from Rs 79.8 billion in 2014-15. The bank says it is proactively trying to reduce NPAs. About 71 per cent of its restructured portfolio is in infrastructure including power and about 29 per cent of the outstanding NPAs are in this sector.
State Bank of India
The State Bank of India (SBI) has also seen NPAs climbing. Gross NPAs rose to Rs 981 billion (March 2016) from Rs 567 billion (March 2015). This amounts to 6.5 per cent of assets. Net NPAs rose to Rs 558 billion (March 2016) from Rs 276 billion (March 2015), which amounted to 3.8 per cent of assets. Restructured assets were at around Rs 661 billion (2015-16). In addition, SBI has placed another Rs 313 billion of assets on the stress watchlist. This includes about Rs 81 billion in construction, power and other infrastructure-related assets. SBI considers several infrastructure and related sectors to be high-stress sectors.
A look at some of the banks with the largest balance sheets and the highest exposures to infrastructure reinforces the feeling that the pain might not have ended yet. There were persistent slippages in the infrastructure sector during 2015-16. There is a trend of cutting back on advances to infrastructure and banks with high infrastructure exposure appear to be nervous about its prospects. On the policy side, it remains to be seen how efficacious schemes like 5/25, SDR, etc. ultimately turn out to be.
Undoubtedly there has been some improvement in terms of activity in certain sectors in the recent past. The sentiment appears to have improved as well. But credit appraisal systems have become tougher. Only well-planned projects with strong promoter backing appear to be winning approval.