PSU banks are struggling with high non performing assets (NPAs) brought about by unfettered lending to high capital intensive industries. The NPA problems of PSU Banks in 2015 are similar to the NPA problems faced by the PSU banks in the 1990’s when the government had to bail out many banks to prevent them from collapsing under the strain of NPA’s. The striking similarity is that the sectors that contributed to the NPA problems of banks in the 1990’s are almost the same, leading to the question, will banks never learn or will crony capitalism ever go away?
It is high time RBI, the regulator of banks, puts in place strict lending norms and credit monitoring systems so that the NPA problems do not resurface again.
Indian banking system asset quality has seen rapid deterioration since 2010-11 with gross non-performing advances and net non-performing advances for the banking system trending sharply upwards. Table 1.
Five sectors have contributed the most to the non performing assets (NPA) of banks. The sectors are mining, iron & steel, aviation, textiles and infrastructure, which together has a share of 24.8% in the total advances of banks and have a very high share of 51.1 % in the total stressed advances as per RBI data. Table 2. Amongst the five sectors, iron & steel and power generation have a significant contribution in total stressed advances, accounting for nearly 26.3% of the total. Amongst the banks, Public Sector Banks have the maximum exposure of 29% of total advances to these five sectors and they contribute to 53.1% of total stressed advances.
The iron & steel sector
India is the 3rd largest producer of steel in the world. However the sector is currently struggling with many problems including global weakness in commodity markets, lower import duty on stainless steel, dumping from China and Brazil, high port duty, slowdown in domestic demand, deceleration in exports due to subdued demand globally and depressed prices in the global market. These factors have created stress in the sector particularly in case of private sector companies. Five out of the top ten private steel producing companies are under severe stress, which is excercebrated on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors.
The Government of India has taken initiatives like increasing the import duty from 5% to 15% for finished and semi-finished steel products but stress levels are not going to go down soon given structural issues.
The power sector
The power sector problems are fuel availability, low plant load factors (PLF) and slow project clearances. Dependence on imported coal, which is three to four times more expensive than domestic coal affects the bottomlines of companies.
Serious bottlenecks exist in the area of power distribution. The deteriorating financial health of power distribution companies is a worry. The states have not been able to strengthen the financial health of power distribution companies under their financial restructuring plans as they have been unable to comply with the requirements relating to the elimination of the gap between average cost of supply and average revenue realized , reduction of transmission & distribution losses and fixing tariff on a regular basis.
Banks have restructured around Rs 530 billion of loans of the seven power distribution companies. Given inadequate fiscal space it is likely that the state governments are not in a position to repay the overdue principal and installments in time and probability of slippage of these exposures into NPAs is very high considering the implementation of new regulatory norms on restructuring of loans and advances effective April 1, 2015.
As per RBI financial stability report “The macro stress test of credit risk suggests that under the normal scenario, the Gross NPA ratio may increase to 4.8 % by September 2015 from 4.6% as of March 2015, which could subsequently improve to 4.7% by March 2016.