Banks to face High NPA’s in 2009

With the commencing of 2009, Indian banks enjoying high profits, with stable credit growth and non interest income, will now have to face challenging times.
Though banks are showing high profits in their balance sheet, but main figure to impact in coming quarters will be of NPA’s (non-performing assets).

NPA’s are also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time.
In the current scenario of global meltdown, these are the real testing time for banks in terms of asset quality of their portfolio and for any new venture they are willing to undertake. The asset quality of Indian banks has shown substantial improvement in recent years—median Net NPA improved 0.73 per cent as against 0.83 per cent in ’07. However, 2008-09 and 2009-10 has the potential to reverse this trend.

As India witness slowdown in economic activity, banks will face a lower demand for loans. NPA’s will also increase on account of borrowers finding it difficult to repay loans. Credit growth is expected to fall to 14% in 2009-10 , in comparison to 22% of last financial year. Rise in NPA’s would mainly be attributed to export oriented small and medium enterprises(SME’s)which are hard hit due surging costs. The growth in credit in the industry in 2008 was in the range of 25-29 per cent on account of working capital requirements of small-, mid- and large-size industries, and the bankers expect an average 25 per cent rise in their credit in 2009. While state-owned banks were quick to respond to the recent signals from policy-makers by reducing interest rates periodically, many Private Sector Banks (PSB) are yet to follow the suit, mainly owing to pressure on their margins.

In this challenging period banks need to prevent exacerbation in their NPA’s. The challenges include: rapid shrinkage in corporate balance sheets, specifically those exposed to commodities and metals; funding of expansion and acquisition plans by highly-leveraged corporate; export-oriented firms facing a slowdown in business due to weak global demand; and volatile currency movements impacting corporate cash flows.

Fresh NPA accumulation could rise to 3.5% of total loans (on 2-year lag), which though lower than the 4.5-5% levels seen in the previous cycle (in the late 90s), may still result in a 2-3 fold jump. Defaults are expected from retail segment like auto loans.

The worst-case scenario for India, which assumes GDP growth will reduce to 6 per cent over the next few years, is likely to create a major challenge for Indian banks. Should they be focusing on growth or should they focus on keeping NPAs under control? Banks may then have to extensively rely on refurbished and dynamic credit scoring models, de-centralized decision-making based on ground level relationship assessment and increasing use of tracking MIS to control their portfolio in these uncertain times.
In comparison to global banks, Indian banks turn out quite strong from asset quality, diversified risk portfolio and low cost deposit base perspective. This is due to their effective management of the business and partly due to the conservative nature of our bankers and the regulator. The key question now facing the industry is:” Is the Indian banking system safe and sound to fight this financial meltdown”.