On February 17, 2016, it was reported that the Supreme Court of India has asked the Reserve Bank of India to provide details on companies that have each defaulted on loans in excess of INR500 Crore. It was also reported that top ten public sector banks in India have written off Rs 40,000 Crore alone in 2015.
The rising NPA (particularly among public sector banks) is a cause of concern as delay in recovery of debt has its impact on the economy. Further, if public sector or private sector banks have increasing NPAs, the credit growth will decline even if the RBI lowers rates.
Therefore, the impact of lower interest rates will not be witnessed in the economy as loosening RBI policy stance will be offset by tightening lending standards. I am particularly concerned about the issue of rising NPAs as the backlog of debt recovery tribunals has surged in the recent years.
The debt recovery tribunals play the role of helping financial institutions recover bad debts quickly. With rise in NPAs, the number of cases in debt recovery tribunals has increased significantly and the backlog of unsettled cases has increased to nearly 4 lakh Crore as of end FY15.
Rising Bad Debts In Indian Banking Sector
Clearly, the huge bad debt backlog is likely to impact the credit growth in the banking system and this, in turn, will impact companies that have reasonably good balance sheet, but are suffering on tightening lending standards.
As I mentioned earlier, the public sector banks are the ones in big trouble and investors can stay away from PSUs for the foreseeable future. For the long-term, private sector banks provide an excellent buying opportunity and I am bullish on ICICI Bank (NYSE: IBN) and HDFC Bank (NYSE: HDB). ICICI Bank and HDFC Bank are the first and second largest private sector banks in India.
I will discuss India’s banking sector penetration in a separate article and that will put into perspective the reasons to be bullish on some of the largest private sector banks. In the near-term depressed sentiments are likely to sustain for the banking industry and investors should use this bearish period to accumulate quality private sector banking stocks.
Chart Source: Economic Survey of India 2015-16