Key sectors like construction, steel and cement sectors, are by March 2015 expected to have the highest stress ratio of non-performing assets (NPAs) according to the Reserve Bank of India (RBI). In the first six months of the current fiscal, net bad loans of 40 listed banks had jumped by 38 per cent, or by around Rs 35,424 crore. As on March 31, 2013, net NPAs were Rs 93,109 crore of the aforementioned banks, which rose to Rs 1,28,533 crore as on September 30, 2013.
With FY14 witnessing a steady rise in NPAs, under the prevailing scenario their dismal run is likely to continue in the forthcoming financial year too, as according to the RBI data available with The Pioneer, the construction sector along with the iron & steel sector is expected to have the highest NPA stress ratio. The central bank has also noted that the adverse macroeconomic shocks would be felt on the iron & steel as well as engineering sectors.
Experts though are a divided lot on the issue, where a section claiming that a change in dispensation at the Centre is likely to ease the stress of NPAs in these sectors, at the same time another lot is of the opinion that this alone would not help and the stress in sectors like construction can only be eased if more discipline is infused into it.
The RBI has divided the stress on the NPAs of these sectors into three time lines: March 2014, September 2014 and March 2015 - thus broadly dividing the financial year 2014-15. In all the three timelines, the central bank has further demarcated the stress percentage ratio of NPAs baseline stress, medium stress and severe stress.
If these three demarcations are taken into account of only the March 2015 timeline, then the NPAs stress percentage in the construction sector, according to RBI data, would come to around 7.7 per cent under baseline stress level. However under the severe stress level by March 2015, this percentage is expected to be around 8.5 per cent in this sector.
Similarly in the iron & steel sector the NPAs stress percentage could be at 6.5 per cent under baseline stress level, while under the severe stress level it could reach a high of 9 per cent. In the engineering sector, the NPAs stress percentage under baseline level is likely to be around 6 per cent while it could reach 8.5 per cent in the severe stress level.
The stress on NPAs under the cement sector may not be as high as the aforementioned three sectors, yet under baseline level it could be around 5.5 per cent while in the severe stress range it could touch 6.5 per cent.
“Restructured loans are mostly expected from construction, steel and cement sectors. Steel and construction sectors are already in a bad shape. With clearances not coming from the Government and big projects going at a slow pace, these sectors are under extreme pressure,” said A K Prabhakar, senior market expert. He added that if the new Government at the Centre starts clearing stuck projects, then things might improve.
Meanwhile, Gaurang Shah, AVP Geojit BNP Paribas stressed that a new Government alone would not be suffice in turning around the construction sector. “Unless there is discipline in the sector, we are not expecting re-rating to happen. Also the real estate regulator has to take more initiatives towards improving the overall sentiment of the industry. The foreign investors are not just waiting for project clearances but also are expecting the regulator to take a proactive role in improving the scenario,” he added.
Shah added that the new Government cannot just focus on the construction and real estate industry and hence the project clearances will not have any major impact towards reviving the sector. “We are expecting the real estate and construction sector to remain under immense pressure. As far as exposure of banks in the sector is concerned, they have already started reducing exposure in order to avoid rise in their bad loans.”