Red alert for banks as loans start bleeding | india | Hindustan Times
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Red alert for banks as loans start bleeding

india Updated: Nov 12, 2008 20:40 IST
Mahua Venkatesh

When the economy is slowing and profits are slumping, can sticky loans be far behind?

The country’s banking industry is set to witness a big rise in non-performing assets (NPA) – which means loans on which payments go missing – because India Inc’s 30 per cent decline in net profits in the July-September quarter signals an imminent rise in default rates, say industry insiders.

Bankers told Hindustan Times that they began to see default rates inching up from September.

“We are yet to see the worst. Corporates have shown signs of non-repayment and though a clear picture is yet to emerge, the going may become tougher for banks in the next few months,” said a senior official at a private sector bank.

The total number of loss-making firms has also increased by about 30 per cent in the second quarter of the current fiscal as compared to the previous fiscal.

At present, the NPA level is about net 1-1.5 per cent – which means less than one in 50 loans or equivalent in loan amount fail to be repaid beyond a defined acceptable level of defaults. An account is classified as NPA if the re-payment process of the outstanding amount does not start within 90 days.

In the last couple of years, banks – public and private — have been able to reduce their level of bad assets due to robust recoveries. “However, recoveries will be dismal with corporates registering their worst performance in a long time,” another banker said.

A large number of small exporters have already started defaulting after they suffered a loss of over Rs 2,000 crore on account of the collapse of the forex derivative market. Banks have been directed by the Reserve Bank of India to transfer the bad assets into a separate account and carry on with lending.

Banks have indicated that they will not stop lending.