Banks and their investors are rejoicing over the potential reduction in stressed loans as corporate bad loan cases are set to get resolved under the time-bound Insolvency and Bankruptcy Code (IBC). Lenders have also pointed to an improvement in the real sector, which has resulted in fresh slippages of banks reducing in the September quarter.
Indeed, the accretion of bad loans in September quarter was the slowest in almost 10 quarters for banks. Many lenders also showed improvement in bad loan ratios.
However, the big question is: Will this last?
The Reserve Bank of India’s (RBI) Financial Stability Report (FSR) has a warning that this improvement may not really be sustained. One of the best indicators of incipient stress is the movement in special mention accounts (SMA).
Between March and September, SMA-2 loan accounts, cases where principal and interest payments are overdue for more than 60 days, surged by 56%. There is a concurrent drop of 40% in SMA-1 accounts, where payment overdue is more than 30 days.
What this means is that stressed companies still aren’t able to generate enough revenue to honour loan payments.
What is also clear from the adjoining chart is that the improvement in asset quality during October-March last fiscal year was fleeting and merely statistical. Large borrowers are still unable to meet loan repayment commitments and banks are still deeply mired in the bad loan mess.