Following the recent downgrade of the country’s largest lender State Bank of India by credit rating agency Moody’s Investor Services, the Reserve Bank of India (RBI) has asked banks to focus on recovery and follow a stringent credit appraisal procedure. The RBI has asked banks to remain cautious in the wake of a higher-than-expected rate hike that could have an adverse impact on the asset quality of banks.
State-owned banks have witnessed a surge in the level of bad assets (loans) or NPAs in recent times. The gross non-performing assets (NPA) of public sector banks stood at Rs 71,047 crore for the period ended March, 2011. A loan that stops earning interest after 90 days is defined as an NPA.
According to Crisil, the Indian arm of global ratings major Standard and Poor’s, a slowdown in economic growth and increases in equated monthly installments (EMIs) resulting from subsequent rate hikes by the RBI, would also increase banks’ NPAs. Rising interest rates would increase the EMIs of home loan borrowers alone by about Rs 6000 crore annually,” the study said. Banks, however, are optimistic. “There is no cause for concern as of now. We are focusing on recovery and we have registered a very healthy recovery,” TM Bhasin, chairman and managing director, Indian Bank, told Hindustan Times.
In the wake of surging NPA levels, banks have decided to get to tough on wilful defaulters — borrowers who have not repaid their dues despite having the capacity to do so. An estimated Rs 11,000 crore of funds are locked up with wilful defaulters.
The central bank has also asked banks to monitor their asset qualities on a regular basis, especially with interest rates steadily inching upwards.
Finance minister Pranab Mukherjee, in his last meeting with bank chairmen, had asked SBI to look into its asset quality. He is also said to have sought an explanation from banks on the reason for the rise in the level of bad assets.
"There has been a substantial increase in bad loans and this is primarily because public sector banks have been very lenient on willful defaulters," said CH Venkatachalam, general secretary, All India Bank Employees Association.