UTS Voice
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Bank’s NPA rises to 3 percent
Increase interest rate or Bad agriculture loan accumulated in last 5-6 years, whatever may be the reason, Bad Debts in Banks are as high as 3% on loan advance made in one year compared with the 1.7% industry average
Some of India’s public sectors banks may be bracing for an uncomfortable ride with fresh bad debts acquired during 2006-07. Results for the April-June quarter of banks such as Punjab National Bank, Dena Bank, UCO Bank, United Bank of India and Vijaya Bank show that fresh bad debts accumulated on their books in 2006-07.
These bad debts, or non-performing assets (NPAs), are as high as 3% of advances (or loans) made last year in the case of some banks compared with the industry average of 1.77%.
An August report released by domestic credit rating agency Icra Ltd said some stress will emerge in the retail as well as corporate loan portfolios of the banks. That’s because of the aggressive expansion plans of firms and higher interest rates that have increased the monthly interest payouts of borrowers and, in turn, resulted in more people and firms being unable to repay the loans. Icra cautions that banks which have seen a rate of fresh bad loan generation of 3% in the past fiscal year can see their bad loans nearly double to 5.42% in March 2010. This is assuming that the banks will be able to recover only 20% of their bad loans, while lending (or credit) grows at 25% for the banking industry.
Icra said banks would need to provide for the likely increase in bad loans “at a pace higher” than the last three years to maintain their bad loan percentages at relatively low levels. The report said that higher provisioning for these bad loans would dilute the banks’ earnings by 0.5-0.6% over the next two or three years compared with 0.3% in 2006-07. Icra suggests that public sector banks could bring down this impact “by improving core profitability or bringing down losses in their fixed income portfolios.”
Vijaya Bank chairman and managing director Prakash P. Mallya said there’s no cause for alarm: “2006-07 saw fresh NPA accretion on account of higher rate of interest that translated into larger monthly payments on mortgages and personal loans. But this is a temporary phase. We have strengthened our risk management system and will be able to contain our NPAs well.”
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