Bank non-performing assets (NPAs) to triple by 2011, but won’t endanger banking sector, says CRISIL

April 23, 2009: The quality of Indian banks’ assets is likely to deteriorate over the next two years. This will be driven by the slowdown in the economy, and by the aging of loans made in recent years: banking sector advances have grown roughly four-fold over the past seven years, to an estimated Rs.27.7 trillion. CRISIL projects that, by end-March 2011, the sector’s gross non-performing assets (GNPAs) will increase to around 5 per cent of its advances, from 2.3 per cent at end-March 2008; in absolute terms, this will mean a tripling of NPAs to Rs.1.9 trillion. Nevertheless, CRISIL believes that the banking sector’s strong capitalisation will allow it to comfortably absorb the effect of the increased NPAs.

Mr. Raman Uberoi, Senior Director, CRISIL Ratings, said, “The increase in NPAs will be driven by delinquencies in corporate loans; this asset class accounts for about 56 per cent of banks’ advances.” The GNPA ratio in this segment is projected to more than double by March 2011, to around 4.1 per cent, from the March 31, 2008 figure of 1.6 per cent. “The deterioration in the asset quality of corporate loans will result from the increasing intensity of the demand slowdown, a lack of access to funding at reasonable rates, movements in foreign exchange rates, and the lengthening working capital cycle. The effect of these factors on loans made to small and medium enterprises will be severe”, Mr. Uberoi added.

In the retail loan book, a combination of dilution in underwriting standards in the recent past, and the aging of loans in the portfolio after a period of rapid growth, will drive delinquencies higher. The GNPA ratio in the retail portfolio, which constitutes more than 20 per of banks’ total advances, is expected to increase to 4.7 per cent by March 31, 2011, from 3.2 per cent as on March 31, 2008.

However, banks are strongly capitalised, cushioning the impact of higher NPAs. The capital coverage for NPAs has increased sharply over the past ten years: the ratio of net worth to net NPAs was 12.8 times as of end-March 2008, against 2.2 times as of end-March 1998.




Mr. Tarun Bhatia, Head, CRISIL Ratings, said, “Given the increase in banks’ net worth over the past ten years, and the reduction in their NPAs, capital coverage for NPAs in the sector is at a very high level. Therefore, even with the expected jump in NPAs, we project the ratio of net worth to net NPAs at 5 times as on March 31, 2011. This provides sufficient coverage for losses that might arise out of these NPAs.” In addition, the banking sector’s assets are far more diversified than they were in 1998, with a greater proportion of the exposure being to retail loans and the service sector.

(This is press release of Crisil)

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