MICROCAPITAL STORY: Indian Public Sector Banks may see an Increase in Non-Performing Assets (NPAs) from Microfinance Loans

Indian public sector banks (PSBs) are expecting a rise in stressed accounts (accounts with delays in repayments of principal and/or interest) this year, according to a press release on The Hindu Business Line, an Indian Business daily. These stressed assets are reportedly arising mainly due to refinancing extended to self-help groups (SHG) and microfinance institutions (MFIs) which in turn had primarily extended credit to rural areas. The deficit in monsoon in several parts of the country this year resulting in poor yields for the drought-hit farm sector has been indicated as one factor largely contributing to these stressed assets. An associated reason cited for the NPAs is that some loans were taken for meeting lifestyle expenditure in rural areas, even where the loans are availed for capital expenditure and for setting up trade units. Elaborating on these factors, Mr. Collin Timms, Chairman of the Guardian Souharda Sahakari Bank, an MFI in India, says, ‘the direct impact of drought is the temporary migration of population away from the affected areas. The migration creates a disruption in loan payments’.

Banks which have already stress tested their assets are now reportedly ‘preparing for the worst’. Some banks have suggested further support in the form of capitalizing the overdue interest payments from the SHG sectors. Others are looking to restructure or reschedule loans to SHGs. In some other cases, the extent of the monsoon deficit is yet to be known and banks, like the Syndicate Bank, are currently still in the process of ‘evaluating’ the situation. To quote the Syndicate Bank’s Executive Director, Mr V.K. Nagar, ‘We are still evaluating the situation, before working out a relief program’. It has also been revealed that despite the asset stress, few banks are in favor of another round of ‘loan forgiveness’, in the form of waivers. It must be stated that a loan waiver in farm credit was extended last year. Under the scheme, there were write-offs and rescheduling of loans accumulating up to INR 1.6 lakh crore (approx USD 328 million).

According to an April 2009 report by Crisil, the specialized credit rating organization focused on microfinance in India, it is estimated that the Gross Non-Performing Assets (GNPA) of the banking sector are likely to touch 5 per cent by the end of March 2011 from a level of 2.3 per cent in end-March 2008 [2]. Crisil estimates that ‘most’ of the NPAs would come from the corporate sector which includes the small and medium enterprises. Reasons given by Crisil for the rise in NPAs include the slowdown in demand and lack of funding of lengthy working capital cycles. Interestingly, the Indian Finance Ministry has disagreed with the rating agency’s forecasts. In this regard, the Minister of State for Finance, Mr. Namo Narain Meena, was quoted as saying ‘I don’t agree with them and I think it will not happen. If we continue to maintain quality lending, there won’t be NPAs’. Similarly, in June this year, Moody’s Investors Service had also reportedly ‘warned’ that the Indian banking system’s asset quality could come under strain, with higher levels of non-performing loans [3].

The prime funders for SHG/ MFIs in India — especially in the rural areas, have been the PSBs and the National Bank for Agriculture and Rural Development (NABARD). Funds to SHGs/ MFIs are provided at rates ranging from 9 to 10 per cent with the actual lending rates to beneficiaries hovering at 24 per cent and the delinquencies until last year reportedly ‘low’ with a recovery of 80 per cent [1]. In the current scenario, the outstanding credit extended to the SHG sector is estimated at INR 12,000 crore (approx USD 24 million). According to Moody’s, while certain rated Indian banks, especially in the private sector, are ‘well capitalized’ and capable of ‘absorbing’ the related costs of the negative credit outlook, the PSBs are not. Private banks, in contrast to their public counterparts, have the ability to raise significant amounts of fresh equity by leveraging favorable capital market conditions, both locally and globally. In the case of PSBs, given stringent rules governing capital ratios and their limited ability to raise new capital, Moody’s has stated that certain PSBs may need fresh equity to counter problems due to strained asset quality and has called for ‘any commitment by the government on this front’ [3]. It may be stated here that the Indian government had recently stated that it may consider the option of recapitalizing PSBs to strengthen their financial position, according to a press release on the Indian daily, The Hindu. For more on the Indian microfinance sector, please look up our past microcapital stories available here.

By Bharathi Ram, Research Assistant

Bibliography:

[1] The Hindu Business Line, Aug 24, 2009, Banks may see a rise in NPAs, http://www.thehindubusinessline.com/2009/08/25/stories/2009082552170600.htm

[2] The Hindu Business Line, Aug 10, 2009, Minister disagrees with Crisil forecast of NPAs, http://www.blonnet.com/2009/08/11/stories/2009081151880600.htm

[3] The Hindu, Asset Quality may come Under Strain, http://www.blonnet.com/2009/06/26/stories/2009062651110600.htm

[4] CRISIL, http://www.crisil.com