Monday, February 27, 2012

Intelligence Report on NPA in Bank

News published in Business Today on 27.02.2012

Indian banks bad loans could jump from 5% to 10% of their total loans

S.P.S. Pannu      New Delhi   February 27, 2012
The Intelligence Bureau (IB) has in a letter to Prime Minister Manmohan Singh warned that the proportion of bad loans on the books of Indian banks could jump from five per cent to 10 per cent of their total loans in the next 12 months mainly on account of "restructured" loans.

IB director Neelanchal Sandhu has pointed out in his monthly report that Indian banks are currently faced with an "impaired loans ratio of five per cent" which means that five per cent of the total loans extended by these banks have turned bad and the chances of recovery are grim.

The report observes that more than half the bad loans fall in the category that were "restructured" in thewake of the economic slowdown that set in following the global financial crisis in 2008-09. The restructured loans category, which includes airlines such as Kingfisher and Air India, account for 2.7 per cent of the total loan portfolio of banks.

Loans are restructured by banks to bail out borrowers when they default in their payments. Easier terms are then offered so that the company keeps getting money from the bank to continue its operation and is given more time to pay back the loan on easier terms.

RBI figures show the total amount locked up in non-performing assets (NPAs) or bad loans of public sector banks touched a whopping Rs 71,047 crore at the end of March 2011. Of this, as much as Rs 29,803 crore of the NPAs is accounted for by non-priority sector lending.

Similarly, in the case of private sector banks Rs 17,971 crore is locked up as NPAs of which Rs 13,147 crore has gone to nonpriority sector lending. The IB report does not augur well for billionaire Vijay Mallya whose ailing Kingfisher Airline (KFA) falls in the restructured loan category. The airline is desperately seeking loans from public sector banks and has succeeded only in making State Bank of India (SBI) break ranks with the rest in its thinking.

SBI Caps has drawn up a revival plan for Kingfisher which forms the basis of the fresh loans that are being considered for reviving the airline. However, apart from SBI other public sector banks do not seem to be as enthused by the idea at this juncture.

The controversy has also become a major issue with bank unions who have gone on the warpath and are protesting against the rising trend of NPAs of banks. AS MANY as seven of the nine employees' unions of banks called for strike on Tuesday, demanding strict steps to recover bad loans and opposing outsourcing of non-core activities to the private sector.

The problem is that the earlier loans to KFA have been classified as NPAs and normally banks do not lend any money to such companies. However, the dilemma before banks is that they are both lenders and equity holders in Kingfisher and claim they cannot let it go down.

Mallya has been desperately seeking working capital and has been pitching for a bailout from the government on same lines that it has been offering to ailing national carrier Air India. Banks had told Mallya to raise fresh equity for another debt restructuring. He was also asked to reduce its debt burden of over Rs 7,057.08 crore.

KFA also announced on Tuesday that it had cut its debt by Rs 200 crore by conversion of Optionally Convertible Debentures (OCDs) into equity shares of the firm.

The IB report sent to the Prime Minister also paints a grim picture of the economy going ahead as it states that "the growth slowdown will be at least as bad as that seen 2008-09, if not more."

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