When the economy slows, bad loans can pinch banks.
Despite robust balance-sheets banks are likely to grapple with growing non performing assets (NPAs) over the next three years as they are likely to rise from 2.3 per cent of advances in March 2008 to 5 per cent in March 2011, says a report by ratings agency Crisil.
NPAs are loans that do not yield interest, based on set definitions.
In absolute numbers NPAs would almost triple from close to Rs 55,000 crore in March 2008 to about Rs 1.9 lakh crore in March 2011. The agency said the increase would be led by delinquencies in the corporate loan books, which account for about 56 per cent of Indian banks’ advances.
“Weakening corporate risk profiles because of the demand slowdown and pressure on operating margins are just some of the factors that would drive this increase,” said Tarun Bhatia, head financial sector ratings, Crisil Ratings.
“Loans to small scale industries (SSI), which constitute 10 per cent of total advances are also expected to be highly vulnerable because their working capital cycles are stretched by rising debtor and inventory levels, while demand has plummeted,” he said.
The gross NPA ratio in this segment is projected to more than double to around 4.1 per cent in March 2011 from 1.6 per cent in March 2008.