As overleveraged companies saddled with stalled projects struggle to repay loans, it is the banks who are probably keeping one eye on the outcome of the upcoming Lok Sabha polls.
A fractured mandate in the elections could turn matters worse for banks, global investment banks have warned.
Between two general elections of 2009 and 2014, gross NPAs (non-performing assets) — shorthand for loans that could turn bad — of Indian banks have soared from Rs. 69,000 crore to an estimated Rs. 2.8 lakh crore.
“In the current downturn, corporate asset quality has deteriorated due to a sustained deceleration in GDP, policy paralysis, high interest rates and higher corporate leverage,” according to a research note issued global brokerage firm UBS last month.
“The issues related to investment cycle (fuel availability, land acquisition etc.) are stickier this time. A weak coalition government at the Centre would be most negative sentiment-wise for corporate private banks as credit costs would likely remain elevated,” the note says.
According to analysts, while the sharp slowdown in growth has hurt most sectors, iron, steel and infrastructure have been hit most by policy logjam.
These two sectors, coupled with textiles, made up for nearly half of total stressed assets.
In another note to investors, Macquire Equities Research has said that while banks are looking to sell bad loans to asset reconstruction companies, the latter do not have an appetite to buy more than 5-10% of stressed assets.
Between October and February, close to Rs. 45,000 crore of bad assets — about 15-20% of overall NPAs of banks — came up for sale. The number could rise to Rs. 60,000 crore by March 2014, almost four-times of last year’s level.
The government and state-owned banks, however, shrugged off any risks of bad loans becoming an unmanageable problem.
“NPAs have risen because of certain things but there is no need to press the alarm button, we have asked banks to focus on recovery to address the issue and banks are more or less on track,” Rajiv Takru, financial services secretary, told HT.
“Recovery is happening and now things are looking up and once the economy picks up, the issue would be addressed to a large extent,” said VR Iyer, chairperson and managing director, Bank of India. Iyer added that RBI’s norms on NPAs have also had a positive impact.
“All banks have taken several steps to ensure that the issue is addressed, we are monitoring all accounts regularly and there is no cause for concern,” said M Narendra, chairman and MD, Indian Overseas Bank.