Rising NPAs of Indian Banks Not a Cause for Concern

Back in April this year, the rating agency Crisil warned that gross Non-Performing Assets (NPA) of banks in India may reach 5% by 2011. Most of the rise in NPA will be due to problems with commercial loans.

ICICI Bank's (IBN) NPA stood at 4.33% in May a 1% increase over the previous year. The NPA of HDFC Bank (HDB) was at 1.91% of total assets. However both these banks are exposed to high retail loans due to aggressive growth in the past few years. Comparatively ICICI is a bit more risky than HDFC.

Despite the rating agency warning, the NPA ratios of Indian banks are small and manageable even if they grow to 5%. This is because historically the NPA has decreased over the past few years as shown below:

Year 2003 = 9.06%
Year 2004 = 7.19%
Year 2005 = 4.91%
Year 2006 = 3.48%
Year 2007 = 2.66%
Year 2008 = 2.40%

Source: Reserve Bank of India

So NPA is projected to double by 2011 from last year's 2.4%. However as mentioned above, the NPA ratio has fallen continuously from 9% in 2003 to less then 3% in 2008. So the rise to 5% in 2011 may not be a severe hit to the banks. While rising NPA is a cause for concern, it may not derail the growth of the banking sector in India and it will be manageable as banks have adequate capital reserves.

Comments

[Subhankar:]

Since a large number of Indian banks are owned and strictly regulated by the Central and State governments, the kind of mindless wild-west frontier mentality displayed by the US banks in introducing 'sophisticated' and esoteric derivatives did not happen.

But the rising NPA's - however small in percentage terms - will haunt the more adventurous banks, like ICICI, in the days to come, even if it doesn't push them towards insolvency. The stock market tends to favour banks with lower NPAs.

Jul 15 08:31 AM

[Uppai Mappla:]

Watch out for higher NPAs for India's public sector banks this year. With monsoons failing, the burden of shoring up the rural economy will fall on these banks. They are not yet overvalued, but most are already ex dividend and if they rise significantly in a bull run in the short term, investors would do well to book profits and wait for a correction to re-enter.

Jul 17 10:33 AM