Bank NPAs on the Rise

The Finance Minister, Mr. Pranab Mukherjee, recently cautioned Indian banks regarding the rising NPAs on their books, and warned bankers to be extremely cautious as they chase fast-paced growth in an economy poised to grow at 10% p.a.

As of March 2010, the combined NPAs of 43 scheduled banks in India stood at Rs 35,946 crore. While Net NPA ratios have declined over the past year, NPAs have risen on an absolute basis, owing to the fast paced credit growth witnessed during the last financial year.

NPAs, or Non-Performing Assets, arise when a customer fails to pay a bank her dues for 90 days. Rising NPAs is one of the earliest signs of stress in the banking system, and has a cascading effect on the entire financial system. When banks have to write-off NPAs, they suffer a hit on their income/ capital, and this forces them to be more conservative while lending to other companies and retail consumers.

As the Indian economy continues its journey towards double digit growth, banks are likely to be at the forefront of economic growth. Backed by credit growth in excess of 20% p.a. (Source: RBI - Monetary Policy Review), bank stocks are likely to be among the performers in the market. However, as value investors, it is pertinent for us to keep a close watch on the NPAs in the system, and invest only in those banks with adequate provisioning cover for their NPAs.