Rs 9,00,000 cr: That's bank money stuck in risky sectors

The bad news for Indian banks just got worse. As the economy slows, the finance ministry - which has to foot the bill for capitalising public sector banks if they end up with bad loans - has asked them to provide details of their exposure to stressed sectors, says a report in The Economic Times.

[caption id=“attachment_158793” align=“alignleft” width=“380” caption=“The banking sector’s total loan book as at ended of 2011 will be around Rs 37,00,000 crore. AFP”]  [/caption]

The ministry has sought details regarding banks’ exposure to aviation, telecom, commercial real estate and power. The exposure to these four sectors specifically comes to around Rs 5,00,000 crore till September 2011, says the newspaper. Slowing investments, low credit growth and high interest rates have all increased the risk of bad assets for banks.

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That such fear is not unfounded is evident from the fact that the bad loans of listed banks in the country soared by 33 percent to over Rs 1,00,000 crore during the second quarter of this fiscal. Firstpost looked closely at Reserve Bank of India (RBI) data to check for bank exposures to risky assets in underperforming sectors like textiles, power, metals, and real estate, and discovered that the amount involved could be as high as Rs 9,00,000 crore.

Going by a CLSA report, the banking sector’s total loan book as at ended of 2011 will be around Rs 37,00,000 crore. The brokerage firm, after assessing risks, says that 20 percent of this loan book is vulnerable to major risks. This gives us a sum of almost Rs 7,50,000 crore that is at risk. The total loan portfolio, when divided sector wise shows that 12.3 percent has gone to agriculture, 7.2 percent to power, 5.6 percent to metals, 3.9 percent to textiles, 1.1 percent to gems and jewelery, 3 percent to commercial real estate and 8 percent to retail loans.

The vulnerable part of the portfolio amounts to 21 percent of the total loan portfolio of banks. Among banks, Canara Bank seems to be in the worst position with almost 35 percent of its loan book comprising real estate, infrastructure, metals and textiles. It is closely followed by Indian Overseas Bank, Punjab National Bank and Corporation Bank, all of whom have more than 30 percent of their loan book exposed to these sectors.

As far as restructured loans are concerned, which give a fair idea of stressed loans in a bank’s portfolio, PNB tops the list with 8 percent of its loan book restructured at the end of September 2011. Agricultural loans are also turning out to be a major concern for banks, with bad loans rising by 150 percent in the last two years despite good monsoons.

Agri-loans have contributed 44 percent to the incremental non-performing loans last year, says out a Macquarie report. Private banks have handled their agriculture portfolios much better than public sector ones. The banks who have the largest share of agri loans in the portfolio and, therefore, more vulnerable are State Bank of India (15 percent), Canara Bank, PNB, Union Bank and Bank of Baroda (14 percent each), and Bank of India (13 percent).

The power sector, which looks to be one of the most risky sectors now with both generation and distribution companies finding it difficult to run operations, is one of the most vulnerable sectors. Canara Bank has a 13 percent exposure to this sector while Oriental Bank of Commerce and Corporation bank have exposures of 11 percent to this sector.

The huge increase in potential bad loans has two implications: public sector banks will need more capital, which means the budget provisions for this sector will have to be raised significantly next year, making fiscal consolidation even more difficult. Secondly, banks will be reluctant to lend more to many sectors, thus worsening the slowdown.