Given how asset quality at Indias PSU banks has been deteriorating, it is not surprising that Moodys downgraded three of the countrys top state-owned lendersPunjab National Bank, Bank of Baroda and Canara Banksaying their financial strength was reduced and that the quality of the loan book was weakening.
Its hard to counter this: with the economy in a downturn and several sectors like telecom, steel and infrastructure in trouble, gross NPAs at PSU banks have moved up to 3.61% at the end of March. Taken together with the restructured portfolio, the share of impaired assets shoots up to a fairly high 11.7%. That too would have been manageable if it looked like the economy was recovering but even getting a 5% GDP in FY14 looks a tall order right now. In short, with interest rates headed up and the rupee down, the pressure on corporate cash flows will continue, which is why its difficult to disagree with Moodys that banks will find it increasingly difficult to reverse the trend of rising NPAs in the near future. RBI reckons slippagesof restructured loans into NPAscould be as high as 20% in a weak economic environment, indicating that the chances of loan quality worsening are high. Indeed, a clutch of seven top banks has indicated it might recast R15,000 crore of debt in the September 2013 quarter alone and that is on the back of close to R10,000 crore being recast in the June 2013 quarter.
While there is no doubt a sluggish economy and relatively high interest are hurting borrowers, it is also true that banks lent less than prudently; the leverage levels of some of Indias big corporates, and some smaller ones too, is evidence of this, as is the large restructured portfolio. If they are to win back their earlier ratings, banks need to exercise far more caution going ahead, both while giving loans and providing for themamong the reasons Moodys has cited for the downgrade, apart from weaker asset quality, are weaker capital buffers and less than adequate provisioning. RBI has tightened norms for provisioningbanks now need to set aside a higher 5% for assets restructured after June 1, 2013, while for assets restructured earlier the provisioning increases in phases from 2.75% currently to 5% by April 2015. But banks need to keep a close watch on their loan portfolios and act at the earliest sign of trouble; its time to