Construction to be top contributor to banks' bad loans: RBI

MUMBAI: The Reserve Bank of India said on Monday that sectors such as iron & steel and construction are expected to be the top contributors to banks' stressed assets, but assured that infrastructure sector is unlikely to exacerbate any credit quality pain in the next financial year. The central bank revealed this in its Financial Stability Report after conducting stress test on lenders.

"Among the select seven sectors, construction is expected to have the highest NPA ratio of around 7.7% by March 2015 followed by iron & steel," the report said.

The adverse macro-economic shocks seem to have the maximum impact on iron & steel and engineering, the report added.

Based on the stress tests, the gross NPAs of public sector and foreign banks under baseline scenario (one parameter for tests) may be around 4.9% and 4.3% by March 2015. The same would rise to 2.6% and 2.7% for old and new private sector lenders, respectively, during the same period.

Banks have been battling huge rise in bad loans, or non-performing assets. State-owned banks are the worst hit when compared with their peers in the private sector space, and the trend is likely to continue till at least March 2015, as the stress test results show.

Net bad loans of 40 listed banks have jumped by 38%, or around Rs 35,424 crore, in the first six months of FY14, according to a study done by NPAsource.com, an Ahmadabad-based advisor. As on March 31, 2013, net NPAs were Rs 93,109 crore, which rose to Rs 1,28,533 crore as on September 30, 2013.

The presumed deterioration in credit quality should naturally attract the obligation of higher provision, which in turn, would deplete the capital base. “CRAR of public sector banks, which is the lowest at 11.20%, may decline further to 9.60% by March 2015 under severe stress scenario,” said the Stability report. “…thus moving much closer to the minimum capital requirement”. As per the RBI guidelines, the minimum capital adequacy requirement is 9%.