Loans With Early Stress Jump 47% Sequentially To Rs 1.89 Lakh Crore In June 2016, RBI Says
A sharp rise in “special mention accounts” could mean rising stress in the banking system
It seems the worst may not be over for India’s banking system. The Reserve Bank of India’s (RBI) asset quality review pushed system-wide bad loans to above Rs 6 lakh crore, but according to data sourced from the central bank, there is a possibility that this number could go higher.
By way of a Right to Information application, BloombergQuint sourced information on the number and quantum of loans categorised as ‘SMA-2’, or category-2 special mention accounts. For the banking sector as a whole, the quantum of loans in this category has risen nearly 47 percent between March and June 2016 to Rs 1.89 lakh crore.
What that means is that there are loans worth Rs 1.89 lakh crore, where either the principal or interest has not been paid for between 61 and 90 days. While not all of these will cross the 90-day threshold and become bad loans, some of them could.
Bankers and analysts attribute this spike to seasonality and believe it would be premature to conclude that stressed assets in the banking system are rising rather than falling.
What is an SMA-2 Account?
As a way to ensure early identification of stress in the banking system, the RBI has asked banks to report any loans on which the interest or principal has not been paid for a period of 30 days. Such a loan becomes a special mention account.
These special mention accounts are further classified into categories: Those where the interest or principal has not been paid for between 30 and 60 days and those where either of the two has not been paid for between 61 and 90 days.
Once the 90-day threshold is breached, a loan becomes a non-performing asset.
What The Numbers Indicate
The RBI’s asset quality review that began in September, 2015 was intended to uncover the stress in the banking system. This meant that loans that were stressed, but categorised as standard were to be recognised as non-performing and provisioned for.
As a result, total bad loans in the banking system nearly doubled to over Rs 6 lakh crore over two quarters. At the same time, the number of SMA-2 accounts in the system reduced from nearly Rs 3 lakh crore in June 2015 to Rs 2.25 lakh crore in December of the same year and subsequently to Rs 1.29 lakh crore in March 2016.
The Financial Express newspaper had reported that the total number of SMA-2 loans had stood at close to Rs 3 lakh crore in the quarter ended June 2015.
While the decline in SMA-2 accounts between March 2015 and March 2016 is explained by the reclassification of stressed accounts into bad, the subsequent increase is surprising as most bankers have suggested in interviews and commentary in the media, that the worst is over.
Data provided by the RBI indicates that between March and June 2016, 688 accounts were added to the SMA-2 category, resulting in a rise of Rs 60,275 crore in loans.
I don’t think a lot should be read into the increase in SMA-2 in the first quarter of this year because there is seasonality involved. June quarter is usually lax in terms of collection by banks, so we have witnessed in the past that there is a spike in the quarter.Abhishek Bhattacharya, India Ratings
Srikanth Vadlamani, VP-senior credit officer at Moody’s Investors Service echoes this view. He believes there has always been element of seasonality between the fiscal ending March and the June quarter.
Asset quality improves in the final quarter as there is a lot of pressure on bankers to get accounts in order before finalising the accounts for the year. The increase in SMA2 sequentially this quarter has to be seen in the context of this seasonality. This is especially true for sectors like agri linked businesses.Srikanth Vadlamani, Moody’s Investor Service
In a recent report, Moody’s assigned a stable outlook to India’s banking system. It believes that while there may still be an increase in the bad loans, the pace of formation of non-performing assets will be lower than what it has been over the past few years.
So while a 47 percent increase in loans categorised as SMA-2 in a single quarter may not point to another spike in non-performing assets, it could suggest that the stress in India’s banking system is far from over.
“There is still stress in the system from sectors like power, steel and construction,” said RK Bansal, chief financial officer at IDBI Bank. “It is possible that firms in these segments could be facing delayed payments. As the reported numbers show, NPAs in the June quarter went up and there may be some further increase in the September quarter as well.”