NPAs of public sector banks set to become worse

Bad loans, or non-performing assets (NPAS), of public sector banks increased during the second quarter (July-September) of this fiscal and are expected to continue into the next financial year as well.

Of the 34 banks that reported earnings for Q2, 25 mainly in the public sector reported a rise in bad loans as measured by gross NPAs as a percentage of total loans, according to data compiled by Thomson Reuters.

The Supreme Court ruling scrapping allocation of 214 coal blocks to companies in power, steel and cement sectors is also expected to fuel bad loans.

Apart from power, metals, mining, highways and textiles have been major stress areas for banks. India Ratings and Research, a unit of credit rating agency Fitch, expects banks to restructure loans worth between Rs 60,000 crore and Rs 1 lakh crore in the next five months with the Reserve Bank of India's (RBI) new rules ending the difference between restructured loans and NPAs coming into effect from April FY15.

Consequently, these banks may have to make higher provisions in their books against bad loans, which could further erode their profits. Banks will also need more funds to act as a buffer against the losses from bad loans.

Lenders are already estimated by analysts to need as much as $110 billion in new capital through March 2019 to comply with new global regulations spelt out in the Basel III norms.

Bank of Baroda, which is the largest public sector bank after State Bank of India, on Friday announced 3.32-per cent increase in NPAs for the second quarter up from 3.15 per cent in the year-ago period.

The bank also saw fresh slippages to the tune of Rs 1,758 crore, which spells more trouble ahead. "The stress in the sector may continue for, at least, one or two quarters," said P. Srinivas, an executive director at BoB.

He expects addition to bad loans to be at current levels. Srinivas added that the bank has sought Rs 500-crore capital infusion from the government this year.

Punjab National Bank also reported an increase in its NPAs to 5.65 per cent of the total loans from 5.14 per cent in the corresponding period a year before.

Leading private sector bank ICICI Bank, which also has exposure to the infrastructure sector, has also reported increase in NPAs to 3.12 per cent of total credit in Q2 of 2014-15 compared 3.05 per cent in the same quarter of the previous fiscal.

The country's top lender SBI will announce its financial results next week. The banking sector is sitting on roughly Rs6 lakh crore worth of stressed loans, which works out to nearly 10 per cent of the total advances, according India Ratings and Research.