Banking sector’s GNPAs to increase to Rs 9.5 lakh crore by March-end: ASSOCHAM-CRISIL study

23 Jan 2018 Evaluate

A joint study carried out by the industry body Associated Chambers of Commerce & Industry of India (ASSOCHAM) and rating agency CRISIL has stated that India’s banking sector will be saddled with gross non-performing assets (GNPAs) worth a staggering Rs 9.5 lakh crore by March-end, up from Rs 8 lakh crore in the year-ago period. It added that the GNPAs will increase to Rs 9.5 lakh crore as on March 31, 2018 i.e. about 10.5 percent of total advances, while stressed assets are expected to be at Rs 11.5 lakh crore.

The report also said that the high level of stressed assets in the banking system however provide enormous opportunity for asset reconstruction companies (ARCs) which are important stakeholders in the NPA resolution process. According to the report, the growth of ARCs is expected to come down significantly to around 12 percent by June 2019, owing to capital constraints, while the assets under management (AUM) are expected to reach at Rs 1 lakh crore, and that is fairly sizable.

With banks are expected to make higher provisioning over and above the provisions made for stressed assets, the report further said that they may sell the assets at lower discounts, thus increasing the capital requirement. It also said since the existing capital base of ARCs will not support in absorbing stressed assets available in the market, they are expected to be a part of the multi-platform business model with co-investors/large funds to bring in capital and stay relevant.

According to the report, recovery prospects are likely to improve with these structural changes. The recovery rate, which is a good indicator of the effectiveness of ARCs is expected to rise from 38 percent earlier to about 44-48 percent. The analysis of 50 stressed assets -- forming nearly 40 percent of the total -- revealed that sectors like metal, construction and power account for nearly 30 percent, 25 percent and 15 percent of the stressed assets respectively, while other sectors contribute to the remaining 30 percent.

The study also said that effective implementation of the Insolvency and Bankruptcy Code (IBC) would be a remedy to the challenge of prolonged litigation and it can help improve the recovery rate of stressed assets’ industry further. The report stated that 2018 would see a structural shift in the stressed assets’ space as increased stringency in banks’ provisioning norms for investments in security receipts is likely to result in more cash purchases.

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