Slippage worry for banks

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The third quarter has been a mixed one for banks. Most saw their core business grow, but by noticeably less. And, in spite of increasing pressures, most have managed to expand their net interest margins (NIMs). In the third quarter, banks have grown both loans and deposits on a sequential and year-on-year (y-o-y) basis. Analysts say private sector banks like HDFC Bank, have changed their strategy and shifted focus to the retail segment. The segment, along with small and medium businesses, has driven credit growth in the current quarter, claim analysts.

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However, along with increase in loans and deposits, they have also recorded an increase in bad loans, due to stress in sectors like telecom and aviation. While on a y-o-y basis, slippages are up, on a sequential basis, they have declined 22 per cent on a higher base, says Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services Ltd. The worrying part is the non-performing loans have arisen not only due to the environment but also because some banks have been rather aggressive in lending with little due diligence conducted, say some analysts.

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State-owned banks are seeing a higher proportion of bad loans compared to their private counterparts. The stock of gross non-performing loans has also increased since 2008. Despite this, there appears no systemic risk, so far. However, analysts say the next few quarters will be challenging, as more assets come up for restructuring. In addition to increase in accretion of bad loans, recoveries have also remained weak. Recovery trends have slipped, from 134 per cent of slippages in 2006 to 68 per cent in 2011, says one HSBC report. Analysts believe the trend will continue in the coming quarters.

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Despite the challenging environment, most banks have managed to hold on to their margins, thanks to the re-pricing of advances after the base rate was increased in the middle of the second quarter. On the positive side, Motilal Oswal says: "Reversal of interest rate cycle, which seems inevitable now, could significantly alter growth and asset quality outlook." While slippages have declined, increase in restructured loans in the third quarter remains a concern.