ICICI Bank and Oriental Bank of Commerce (OBC) best in managing NPA

ICICI Bank and Oriental Bank of Commerce (OBC) have emerged as the top performing banks in terms of cleaning their bad assets and bringing down non-performing assets, taking advantage of healthy GDP growth and impressive topline and bottomline performance by borrowers.

According to Assocham Eco Pulse study, ICICI Bank was able to cut its NPA by 65.02 per cent while OBC reduced its NPAs by 61.54 per cent as on March 31, 2006 as compared on March 31,2005.

Although the ICICI Bank reduced its bad assets by maximum percentage points among the 13 banks tracked by the AEP study, it is OBC which has emerged as the best performer in terms of size of net NPAs. OBC’s net NPAs were 0.5 per cent while for the ICICI Bank the figure was 0.71 per cent. The Indian Overseas Bank, Corporation Bank, UTI Bank and Bank of Baroda were the next best performers in cutting their net NPAs by 0.65 per cent, 0.64 per cent, 0.75 per cent and 0.87 per cent respectively.

Most of the commercial banks have substantially reduced their non-performing assets (NPAs) ranging between 29 per cent and 65 per cent, as they registered a handsome growth in their retail advances in the fourth quarter of fiscal 2005-06. Riding on the above 8 per cent growth of economy, the NPAs of the scheduled commercial banks went down by 44 per cent on an aggregate.

Other major Banks with significant reduction in their NPAs are Indian Overseas Bank (49 per cent), Corporation Bank (43 per cent), Dena Bank (42 per cent), Bank of India (48 per cent), Bank of Baroda, Union Bank, Canara Bank and IDBI Bank (40 per cent), UTI (30 per cent) and SBI (29 per cent). Hence, there is less drag on the Balance Sheet because of reduction in the NPAs.

One of the significant reasons for a substantial decline in NPAs in the banking system is the low level of default in the retail sector as compared to other sectors.

The retail sector has also made a noticeable contribution in getting more business, as a major thrust to non-food credit growth has, in the recent years, emanated from sectors, particularly housing and retail loans.

As a result of strong economic fundamentals, the aspirations of middle class people have grown on account of rise in income levels, as they have exhibited strong growth in their spending. In response to the robust growth in consumer spending, housing loans increased by 29.1 per cent in fiscal 2005-06, and accounted for 14.6 per cent of the incremental non-food credit.

The hallmark performance of the banking industry in improving the quality of assets is to a large extent related to an impressive growth in the retail banking. HDFC Bank was one of the top performers in mounting its retail portfolio, which saw a huge growth of 80 per cent in its retail business.

Others doing well in this area of lucrative retail banking are Bank of Baroda (53 per cent increase), UTI Bank (39 per cent), Oriental Bank of Commerce (37 per cent), Bank of India (37 per cent), and Union Bank (35 per cent).

The RBI has, however, expressed concern on the unprecedented increase in the retail credit, as regards the inherent risk of erosion of the credit quality. The NPAs in the retail loan segment are currently at a low level of around 2 per cent. Therefore, increasing retail credit should not be much cause of concern for the future.

The 14 per cent increase in the interest income of the scheduled commercial banks can also be attributed to improving the quality of assets. The robust credit expansion by the banks has led to a noticeable increase in the banks’ interest income, as non-food credit was mainly deployed in the housing and real estate segment.

As per the AEP findings, the hike in the Prime Lending rate (PLRs) supplemented by robust credit growth, led to a significant increase in the interest earned by the major commercial banks. Scheduled banks’ non-food credit rose by 37 per cent in 2005-06, over and above 27.5 per cent a year ago.

The remarkable growth in the interest income of SCBs, on the back of huge credit disbursement, made a significant contribution in lowering the NPAs of the leading commercial banks.

Though, the banks have exhibited a remarkable performance in lowering their NPAs in the fiscal 2005-06, at the same time, the banks also need to focus on deposit mobilization, as per the RBI advice.

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