Banks see a rise in delayed payments: Another big NPA shocker may be in the making

Analysts are still divided on whether Indian banks are past the peak of their bad loan problems or not. The April-June quarter numbers of some of the state-run banks indeed show an improvement in the gross non-performing asset (NPA) numbers. Similarly, after the new provisioning norms from the Reserve Bank of India (RBI) on restructured loans, there has not been a single case of new referrals to CDR cell in the June quarter. The question is when ground-level economic situation hasn’t changed much, how incremental NPAs have come down and where did new loan recast proposals disappear. Probably, if one looks at the NPAs with restructured loans (total stressed assets), which continues to stay high as a percentage of their total loan book, the answer will be obvious. Also, troubled companies are now seeking asylum under Joint Lenders’ Forum to get their loans restructured. [caption id=“attachment_2385600” align=“alignleft” width=“380”]  Reuters[/caption]

But, most analysts are puzzled on another point–the substantial jump in the amount of loans in Special Mention Accounts-2 (SMA-2) of banks in the last few quarters. SMA-2 are loans, where repayment is due over 60 days. This structure came into place when the Reserve Bank of India (RBI) brought in rules for early identification of stress in India’s banking system.

What this means is that the chunk of loans that are on the verge of turning bad have risen substantially this year. One reason why SMA-2 has swelled to this extent is there are several habitual late payers in the banking sector. Technically, these loans are standard but not far from falling in to the NPA category. Under the RBI norms, a loan is tagged as NPA only when interest payments are overdue on the 91st day. How big is SMA-2? That’s the tricky part. Banks do not share the data on SMA-2 loans, says Vaibhav Agrawal, vice-president - research at Angel Broking Ltd. Ambit Capital, in a recent report on ICICI Bank, too had mentioned about the problem of loans that falls in the SMA-2 category. The amount of loans that were falling behind in payments, but still classified as standard loans, nearly doubled in the last fiscal year, increasing the risk of higher bad loans in the future, said Ambit. “The delinquency breakup of the standard loan book suggests that early delinquencies (31-90 day due) have almost doubled from 3.6 percent of loans as of 2013-14 to 6.4 percent of loans as at 2014-15,” Ambit has said in the report. ICICI is just one case. There are many other banks where SMA-2 loan book has been ballooning this year. Banking analysts are largely clueless on the SMA-2 situation since banks refuse to fully share the numbers pertaining to this category with them. “SMA-2 loan book of banks is huge,” said Dipankar Choudhury, a senior analyst, who have been closely tracking the sector for years. “Anecdotal evidence suggest that SMA-2 loans would amount to at least 6-7 percent of the total loan book of Indian banks. Unless the RBI insists banks to declare these numbers, it is difficult to get a true picture,” Choudhury said. Experts worried on 5/25 scheme The portion of ‘standard’ loans on the books of banks that aren’t quite ‘standard’ can go up substantially if the so-called 5/25 scheme for infrastructure projects is misused, experts warn. Under the scheme, banks refinance a 25-year loan after a period of every five years. But such refinancing wouldn’t amount to restructuring or attract higher provisions. Though the intention is good — lending a helping hand to core infrastructure projects that are struggling but have a future potential — banks may misuse this facility, experts said. “If the account remains ‘standard’ but figures in the list of SMA 1 (30 to 60 days loan servicing delay) or SMA 2 (60 to 90 days loan servicing delay) around the time of refinancing, then there may be a scenario where the existing lenders would refinance and possibly re-draw the amortisation schedule and thereby avoid the account from getting tagged as restructured or NPA. In a sense banks may be tempted to extend the refinancing facility and ‘pretend’ it is a standard asset,” said Deep Mukherjee, senior director, corporate ratings with India Ratings & Research in a recent article published in Firstpost. Presently, the total amount of NPAs on the books of Indian banks at this stage is Rs 3 lakh crore. Total loans currently being restructured under the corporate debt restructuring (CDR) mechanism is Rs 2.86 lakh crore. The chunk of loans restructured under bilateral agreement between banks and corporations would be about an equal amount. Together, such assets (stressed assets) stand at about Rs 6 lakh crore or 10.5 percent of the total bank credit. As this author has repeatedly cautioned in the past, hidden bad loans are a bigger threat than the ones declared already. This is because the industry and the regulator have an understanding of the extent of the problem with respect to the declared bad loans, but less with respect to the hidden stress. To be sure, as things stand now, SMA-2 loans aren’t bad loans. But, the sharp rise in this category of loans offers a clear warning signal. If the economic recovery takes more time to materialise than expected, a major part of this can eventually turn into NPAs, adding to the current burden of banks. This will require banks, state-run banks in particular, to seek more capital than what is estimated now. The government has promised to infuse Rs 70,000 crore in state-run banks over the next four years and wants them to raise the remaining part from the markets. The government, which was initially reluctant to infuse capital in banks, was forced to reverse its decision, after the RBI put pressure on the government for urgent recapitalisation of banks to provide for bad loans. Whether banks can indeed attract investors from the market is doubtful. The larger point is that the whole assumption of capital needs of banks is based on the current understanding of the bad loan scenario. If economic recovery doesn’t happen quickly, corporate health will weaken further and next round of NPA shocker can emerge from SMA-2 category loans. While it is true that banks are indeed in a difficult position due to their state of asset quality and poor economic conditions, it will be better to show NPAs as NPAs as early as possible and come clean, rather than accumulating the problem.