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Leading corporate borrowers may push up NPAs of banks

IRON & STEEL

Company	Banks	FIs	Others	Total
Essar Steel	15.4	20.6	5.2	41.2
Jindal Strips	1.7	6.2	1.6	9.5
Mukand	3.5	1.9	0.5	5.8
SAIL	40.1	106.4	26.6	173.0
Tisco	5.9	27.9	7.0	40.8
Jindal Vijaynagar Steel*	3.9	9.0	2.2	15.1
Jindal Iron & Steel *	2.8	3.8	0.9	7.5

TEXTILES

Company	Banks	FIs	Others	Total
Baroda Rayon	0.3	0.8	0.2	1.3
Century Enka	0.1	0.3	0.1	0.6
Century Textiles	7.0	7.5	1.9	16.5
DCL Polyesters	0.4	1.1	0.3	1.8
JCT	2.9	2.7	0.7	6.2
J K Synthetics	2.0	2.8	0.7	5.5
Morarjee Goculdas Spinning	0.8	0.5	0.1	1.4
Raymond Synthetics	0.3	2.4	0.6	3.4
Sanghi Polyester	1.8	1.9	0.5	4.2
Indo-Rama Synthetics*	3.1	7.4	1.9	12.3

CHEMICALS

Company	Banks	FIs	Others	Total
Finolex Industries	0.9	2.3	0.6	3.7
Gujarat Alkalies & Chemicals	0.8	4.5	1.1	6.4
Hindustan Organic Chemicals	0.7	1.3	0.3	2.4
IPCL	3.9	23.2	5.8	32.9
National Organic Chemical	2.5	1.6	0.4	4.5

REFINERY

Company	Banks	FIs	Others	Total
Mangalore Refinery & Petrochemicals	4.8	17.8	4.4	27.0
Essar Oil	1.4	15.3	3.8	20.5
Grand total	108.1	273.4	68.3	449.9

Figures as at March 1998

Source: Credit Lyonnaise

While the above figures do not appear very alarming (at least not to banks), it would still be foolhardy to underestimate the problem of NPAs. The current downturn has severely affected the small and medium-sized industries as also trade, and there is a fairly large potential for bank / FI assets to turn bad in these areas, the FII report says.

The impact of rising NPAs on banks' balance-sheets is two-fold:

1. a ten per cent provision has to be made on the new NPAs; and

2. there is a loss of interest income on substandard assets.

When an asset becomes substandard, not only does the bank have to forego interest income for that year but also has to reverse the interest income booked in the previous year from the date when the payment first became due. The FII estimates that this loss of interest income is about 15 per cent of the loan amount.

Thus, the total impact in the first year of an asset turning substandard is about 25 per cent of the loan amount. The incremental provisioning and loss of interest income can shave-off up to 60 per cent of the projected FY 99 net profits for the larger banks. The impact is lesser on the smaller banks and institutions.

However, the higher proportion of zero-risk weighted assets make Indian banks' balance-sheets less vulnerable. While the concerns on the financial intermediaries' deteriorating asset quality, their ability to provide for the loan losses and the consequent re-capitalisation needs that may arise, are all very natural, an important fact is that Indian banks have a very high proportion of zero-risk weighted assets in their balance-sheet.

Loans constitute only 41 per cent of a bank's assets and another one per cent of assets is deployed in corporate treasury instruments like commercial paper, bonds and debentures. So only about 42 per cent of assets (besides fixed and miscellaneous assets) are in the 100 per cent risk-weighted category.

As against this, as much as 45 per cent of banks' assets are deployed in government bonds and deposits with the RBI. These are zero-risk weighted assets and provide a fairly attractive return to the bank. Other assets comprise money market instruments, fixed and miscellaneous assets, which carry very little risk. The very low level of loans in total assets considerably lowers the risk profile and enhances the provisioning capabilities of banks.

Narasimhan Committee's recommendations and implications