RBI’s NPA forecast should act as a warning signal for LIC which is looking at a controlling stake in IDBI bank

For Indian banking sector, the pain from non-performing assets (NPAs) is far from over. The latest Financial Stability Report (FSR) from the RBI (Reserve Bank of India), released yesterday, gives a baseline scenario of bank’s gross NPAs rising to 12.2 percent by March 2019 from 11.6 percent in March 2018. In other words, for every Rs 100 that the banks have lent, Rs 12.2 is less likely to come back from the borrowers by next year.

Along with this, the capital to risk weighted assets ratio of banks (CRAR), an important measure of financial health of banks, will come down to 12.8 percent from 13.5 percent during the period, the report said. What the above NPA projections say effectively is that there are more shocks left for public sector banks (PSBs) because over 90 percent of the NPAs are on their books. Remember, these estimates are based on declared figures by banks. The actual NPAs could be much higher if one takes into account the amount of hidden NPAs technically adjusted as performing loans for now.

The NPA projection in FSR is a message to the government that going ahead PSBs will require much more capital to fulfill their NPA provisioning requirement. Banks need to set aside certain amount of money in the form of provisions. Being the majority owner of PSBs, which accounts for 70 percent of the assets in the banking system, the onus lies on the government to find enough capital.

Even the Rs 2.11 lakh crore capital infusion plan announced by the government for state-run banks is too little, former RBI deputy governor, K C Chakrabarty had warned in October last year. This means, if the NPA picture gets worse, the government’s job of recapitalising 21 state-run banks, 18 of which have NPAs above 10 percent of their total loans, isn’t getting any easier.

The FSR report, particularly the RBI’s NPA projection, is a recommended read for the board and top management of Life Insurance Corporation (LIC), which is rumored to be looking at acquiring a controlling stake in IDBI Bank. LIC should take a closer look at IDBI Bank’s financials before going for the stake buy plan. The bank has gross NPAs close to 28 percent at the end of March, 2018. In absolute terms, gross bad loans stood at Rs 55,588.26 crore as against Rs 44,752.59 crore on 31 March, 2017.

Provisioning for NPAs were raised to Rs 10,773.30 crore in the fourth-quarter of the fiscal ended March 2018, up from Rs 6,054.39 crore parked aside in the year-ago period. In the fourth-quarter, IDBI Bank's net loss widened to Rs 5,662.76 crore as a higher provisioning for NPAs hurt its bottomline. If indeed the LIC is going for a controlling stake, logically the burden of filling up the capital void will be with the insurer that has no prior experience in banking business. And this capital requirement will not end with a one-time capital infusion but will have to be a recurring exercise every single year. Will this be in the interest of the customers who trust in the LIC?

At a larger level, the NPA scenario in the banking system reminds the need for an urgent roadmap for the privatisation of the state-run banks, may be with the exception of few large ones. The governments, whether UPA or NDA, have so far refused to take a serious look at the privatisation agenda. This inaction can backfire in a big way at some point in the future with bigger ramifications.