Bitter truth about Indian banking now out

According to the RBI note, large borrowers accounted for 87.4% of the bad loans in the system as of September this year compared with 78.2% in March.

The Reserve Bank of India’s semi-annual financial stability report stated the obvious and what has been feared by analysts for long. But coming from the horse’s mouth, the banks’ bad debt issue is now going to receive more focus of investors and policy makers alike.
 
The RBI report said despite an improvement in companies' overall ability to repay debt in the first two quarters in this financial year, the state-owned banks are likely to see an increase in bad loans over the next year. The report warned about bad debt getting "more concentrated" among large and highly-leveraged borrowers.
 
According to the RBI note, large borrowers accounted for 87.4% of the bad loans in the system as of September this year compared with 78.2% in March. As much as 24.2% of advances of Indian banks were to five key sectors -- mining, iron and steel, textiles, infrastructure and aviation --  as of June, and which accounted for 53% of the stressed debt, most of it with the public sector lenders.
 
In absolute terms, public sector banks' gross non-performing assets rose by 6.27% to Rs.3.04 lakh crore at the end of the September quarter from Rs 2.86 lakh crore in the year-ago period. 
 
The central bank had earlier identified 150 companies (including accounts which were part of corporate debt restructuring) where it sees divergence in current asset classification in most banks' balance sheet and the underlying stress. 
 
Asset quality of PSU banks remains a near-term headwind for the sector, which is why many of these stocks have been weak performers this year. Economists and analysts warn that cleaning-up bad loan from the banking system is the need of the hour and that alone can create room for fresh lending and help better credit off take in the economy.
 
Most of the PSU banks would need some time to clean their books, and that would lead to further downside at least in the near term. According to RBI, gross non-performing assets (NPAs) of scheduled commercial banks, as a percentage of loans, increased to 5.1% in September from 4.6% in March. Under the baseline scenario tested for the report, overall NPAs are projected to rise to 5.4% by September 2016 before improving.
 
It said a large number of companies that have troubles with high leverage, low cash generation and challenges in accessing capital will weigh on the capital expenditure growth over the next two to three years.