"Hardening of interest rates might have also resulted in increased NPAs (non-performing assets). Banks had extended housing loans at floating interest rates. The hardening of interest rates might have made the repayment of loans difficult for some borrowers, resulting in some increase in NPAs in this sector," the central bank's report said.
Though the latest data are unavailable, bankers said there has been a spurt in defaults even on housing loans, while unsecured loans such as personal loans and credit cards have seen delinquency levels almost double over the last 12 months. Lower demand in the domestic and overseas markets is also affecting the ability of companies, especially in real estate, textiles, steel, cement and infrastructure sectors, to repay loans. RBI recently simplified the norms related to restructuring of loans.
"The increase in gross NPAs was more with new private sector and foreign banks, which have been more active in the real estate and housing loan segments. Gross NPAs, in absolute terms, declined with nationalised and old private sector banks," the report said.
With the volume of gross NPAs of Indian banks rising for the first time since 2001-02, RBI emphasised the need to set up an efficient credit information system to improve the credit risk management. RBI is in the process of finalising the names of players that can commence business as credit information companies and help improve the credit culture.
The banking regulator pointed out that although the asset quality of banks has improved in recent years, in 2007-08 there was an increase in NPAs in absolute terms, and banks need to ensure that hard-earned gains in reducing NPAs are not frittered away. RBI said banks recorded an increase in NPAs in absolute terms due to the rapid credit growth during the previous three years.
While calling for an improvement in the recovery mechanism, the central bank said banks are now required to lay down policies governing valuation to ensure that the economic value of financial assets is reasonably estimated and the assessment is based on the cash flows arising out of repayment and recovery prospects on purchase or sale of NPAs among banks.
RBI said the asset quality of scheduled commercial banks improved during 2007-08, with a decline in gross NPAs as percentage of loans and advances. The net NPAs as percentage of net advances remained unchanged at the previous year's level.
During 2007-08, while overall gross NPAs of banks declined to 2.3 per cent of gross advances from 2.5 per cent in the previous year, net NPAs as a percentage of net advances remained at the previous year's level of 1 per cent.
However, barring old private sector banks, gross and net NPAs were higher in absolute terms as fresh accruals of NPAs exceeded the NPAs recovered and written off during the year across all banks. The gross NPA ratio (as a percentage of gross advances) of new private sector banks recorded the highest jump at Rs 10,426 crore at the end of March 2008 as against Rs 6,286 crore as on March 2007.
