Banks begin 2016 with $60 bn in bad loans

Banks begin 2016 with $60 bn in bad loans
Highlights

As a New Year begins, it’s not a clean slate for the banks with balance sheets full of red ink due to huge bad loans worth about $60 billion and a serious clean-up job is a must in 2016 with the RBI having set a deadline.

Mumbai: As a New Year begins, it’s not a clean slate for the banks with balance sheets full of red ink due to huge bad loans worth about $60 billion and a serious clean-up job is a must in 2016 with the RBI having set a deadline.

At the same time, the existing public and private sector banks would also have to prove their competitiveness in the wake of two entirely new breeds of banks joining the fray in the form of payments and small finance banks this year.
At the end of the day, it will be the customers and the quality of services offered to them that will matter and the bankers are almost unanimous that the technology is going to remain the key plank for the banking sector going ahead.
ICICI Bank’s CEO Chanda Kochhar said the financial sector will see continued innovations based on technology that will deliver enhanced convenience and value to customers. But it is the technology that the new entrants with payments bank license are looking to tap for making a mark in the $1.5 trillion banking industry and to challenge the traditional banking models.
State-run SBI’s chief Arundhati Bhattacharya, known for being vocal with her views, said the new ‘agile’ players may have an edge as they are not bound by industry-level wage agreements which can lead to “a dog-eat-dog’s world. Existing universal banks stand to face challenges given the fact that these banks will be coming in without any risk, that they will be coming in with an agile system and delivery models and that they have not been held hostage by industry-level agreements and wage limits.”
Another key issue for the banks in the New Year would be RBI’s new diktat for following a uniform method for setting their base lending rates, which follows Governor Raghuram Rajan repeatedly chiding the bankers to ensure passing on full benefits of the central bank’s repo rate cuts to customers. A sense of unease is there among the bankers on this, but not many of them have spoken out publicly on this, again sans the SBI chief, who said that RBI’s repo rate was a “blunt instrument”.
While such run-ins are expected to continue between the banks and the central bank this year, Rajan has shown no signs of relenting on the deadline of March 2017 given to the banks to clean up their balance sheets and banks are most likely to be supportive of his measures in the fight against bad loans, which is estimated to have ballooned to Rs 4 lakh crore or about $60 billion.
In the recently released Financial Stability Report, RBI said as of September quarter, led by state-run banks, gross NPAs rose to 5.1 per cent from 4.6 per cent in March 2015, while net NPAs increased to 2.8 per cent from 2.5 per cent during the same period taking the total stressed assets to 11.1 per cent. The NPAs may rise further in the initial months of 2016 as the RBI has reportedly identified top 150 defaulters and asked banks to make additional provisions for those loans.
With rising NPAs, banks’ profitability continues to take a hit with the state-run banks posting a 19 per cent dip in profits for the second quarter of the current fiscal, although private sector banks managed to log in a 15 per cent growth.
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