If Non-performing Assets (NPAs) and Capital Adequacy Ratio (CAR) reported by commercial banks are an indication of their financial strength, the second quarter results of Indian banking sector portray a mixed picture.
This is because the net non-performing assets have risen by an average 26 per cent while capital adequacy ratio improved by 1.60 percentage points in Q2 of current fiscal as compared to the corresponding period of previous year.
Improvement in CAR reflects better financial health of banks and government recent move to recapitalize weak PSUs bank is a right move while increase in NPAs is a matter of concern as it directly affects the solvency and profitability of banks.
According to ASSOCHAM, the increase in NPA of the compared period should inspire government to quickly move towards banks consolidation as it will bring down their risks and expand banks balance sheet size to global standard to take on emerging challenges in the financial sector, said ASSOCHAM President, Dr. Swati Piramal.
Solvency Analysis of Indian Banking Sector as carried out by ASSOCHAM reveals that on an average 26 per cent rise in net non performing assets (NPAs) have been registered by 21public sector and commercial banks during the second quarter of the FY’10 as against Q2-FY’09.
However, the average capital adequacy ratio (CAR) of the banks improved to 13.68 per cent in Q2-FY ‘10 from 12.08 per cent in the previous year, added Dr. Piramal.
The analysis of the Indian banking sector was based on the quarterly results posted by 21 Indian banks For a macro analysis, the total 21 banks included an aggregation of 19 public sector banks (PSBs) and 2 major private sector banks.
It is also based on two broad parameters including net non performing assets and capital adequacy ratio and also the new enhanced provisioning coverage ratio and additional provisioning on commercial real estate standard assets.
“Although the Indian banking sector has remained insulated from the global financial crisis, the emerging trends show mixed signals”, said Dr. Piramal.
As per the analysis, the aggregate net non-performing assets (NPA) of 21banks increased by 26 per cent to Rs 25137 crore in second quarter of 20010 from Rs 19920 crore in the same period of FY’09.
In terms of capital adequacy ratio, out of the 21 banks posting their results for the quarter ending September 2009-10 it was found that 4 banks witnessed a fall in their CAR from the previous fiscal, but they still managed to remain above the prescribed limit of nine per cent posed by the Basel II accord.
The latest move by RBI asking banks to increase their provisioning coverage ratio to a minimum of 70% by the end of Sept., 10 is going to impact the profits of large number of banks. As against the PCR of 56% as on Sept., 2009, the additional burden on this count , by one estimate ,will be around Rs 13000 crores.
More so the RBI has increased general provisioning on Commercial real estate from 0.4% to 1.0 % on standard assets will drive the borrowing cost as well as additional provisioning. The slow credit growth is further likely to impact the bottom lines of banks. Therefore the banking sector is likely to see rough weather until the credit expansion takes a fast track.