NPA IS A Matter Of Concern

Growth of bank non-performing assets is a cause for concern: Economic Survey-Fin Exp

The four-fold rise in bad loans over the past two years, mainly of public sector banks is a matter of concern and steps are being taken to improve the situation, the Economic Survey said.

"During 2012-13, the deteriorating asset quality of the banking sector emerged as a major concern, with gross NPAs (non-performing assets) of banks registering a sharp increase...Growth of NPA is a cause for concern," the Survey tabled in Parliament by Finance Minister Arun Jaitley said.

The bad loans of public sector banks were at 4.4 per cent in March 2014 compared with 2.09 per cent in 2008-09, it said, adding, the gross NPA increased by almost four times from March 2010 (Rs 59,972 crore) to March 2014 (Rs 2,04,249 crore).

Increase in NPAs of banks is mainly accounted for by switchover to system-based identification of NPAs by PSBs (public sector banks), slowdown of economic growth, and aggressive lending by banks in the past, especially during good times, it said.

Overall NPAs or bad loans of the banks, including private sector lenders, increased from 2.36 per cent to 3.90 per cent in March 2014. Increase was sharp in case of infrastructure with NPAs rising from 3.23 per cent to 8.22 per cent, it said.

Infrastructure, iron and steel, textiles, aviation and mining are five main sector that are stressed.

"The next wave of infrastructure financing will require a capable bond market."

Despite, asset quality deteriorating, the survey said the capital positions of Indian banks, including that of public sector, remained strong and above the stipulated minimum.

Highlighting challenges and outlook, the Survey said financial markets continue to suffer from illiquidity and a major objective should be to develop bond-currency derivative (BCD) nexus to equity market quality levels.

It said most households are as yet cut off from large parts of the financial system and bank-centric notions of financial inclusion have limited value.

The speed of reforms in the financial sector has not kept pace with financial innovation and the next wave of reforms will be through strengthening the laws, organisations, well designed policy decisions, consistency, and transparency for a globalised India, it said.

On financial inclusion, the Survey said it "is an important priority of the government".

To extend the reach of banking, PSBs opened 7,840 branches in 2013-14 compared to 4,432 in 2012-13, it added.

Going forward, the draft Indian Financial Code of the Financial Sector Legislative Reforms Commission (FSLRC) seeks to address the present weaknesses of the Indian financial system, and meet the requirements of the Indian economy over the coming 30 years.

PSBs can tide over ALM issues with long-term bonds: India Rating-Business Standard

Says rise in ALMs in state-run banks is due to the growing divergence in the tenors of loans and deposits

ssuing senior long-term bonds may help public sector banks correct their asset liability mismatches and also improve liquidity coverage ratio, says a report by rating agency India Rating.

"Permitting state-run banks to issue senior long-term bonds will help correct asset-liability mismatches (ALM) and provide a tool to improve liquidity coverage ratio by extending funding outflows," India Ratings said in a report today.

It also said the rise in ALMs in state-run banks is due to the growing divergence in the tenors of loans and deposits.

For the state-run banks, the cumulative negative funding gap up to one year has increased to 15.7% of assets as at end-March 2014 from below 4% in 2002.

For some banks, there is even a shortage of ready collateral that could be used to repo with the Reserve Bank in a liquidity squeeze, the report said.

The rating agency believes that the trend of rising funding gaps in the banking system is unsustainable, particularly as an economic revival may require continued bank funding for longer tenor infrastructure loans.

Senior bonds are rated at the same level as banks' long-term issuer rating in the absence of a bank resolution regime and are not treated like loss-absorbing hybrid capital, the report said.

State-run banks have easy access to long-term investors such as insurance and pension funds and hence are well placed to tap this market, the report said.

The existing guideline that permits banks to issue 'infrastructure bonds' has not found favour with investors, perhaps due to the implicit link with a sector that has been struggling to perform for some time.

Senior bonds issued globally by domestic banks have a good investor base. A similar (and possibly larger) market can be created among domestic investors, the report said.

It further said the banking system's dependence on short-term liabilities has grown to a point where refinancing pressures are hurting margins.

"This also poses unique policy challenges, including diluted monetary transmission, a persistently flat-to-inverted yield curve and crowding out corporates from the commercial paper market," the report said.

Deposits maturing within one year increased to almost 50% of total deposits in 2014, up from 33% in 2002. The ratio had dipped in 2013 after growth in advances had moderated, before rising in 2014, it said.

A significant portion of these deposits had maturities within six months and, for some banks, included a growing share of wholesale money market borrowings.