The Hindu Business Line : Good recoveries bring cheer to bankers

Recoveries this year are expected to be in excess of Rs 250 crore for each of the banks. Besides, there was little NPA accretion during the last fiscal.

Bangalore , April 4

BANKERS have a cause to cheer for their performance in the last financial year. Most of them are expected to turn in good results on the back of good recoveries of the delinquent loans.

Banking sources said that despite the high depreciation during the last year, none of the large public sector banks would be affected.

Recoveries this year are expected to be in excess of Rs 250 crore for each of the banks. Besides, there was little NPA accretion during the last fiscal, bankers said. On incremental basis, bankers said that the provisioning for bad loans had reached international levels.

Bankers said that the NPA recoveries had been fully provided. Consequently, the recoveries of the principal would become part of the capital reserves. Interest and penal receipts would become part of the profit and loss account and treated as part of extraordinary income. These elements would then contribute to beefing both the capital as well as the incomes of the banks.

At the same time, bankers said that the NPA coverage ratios would rise to above 75 per cent for the entire banking sector, though in some cases it would be as high as 90 per cent. NPA coverage ratio reflects the quantum of bank provisions as part of the non-performing loans.

Along with the recovery efforts, bankers said that last year, most of them had shown non-food credit growth in excess of 30 per cent. Along with the low NPA provisions, credit growth was a substantial driver of profits, unlike in the past, they said.

For the last four years treasuries had driven bank profits. But treasury income in 2004-05 was substantially lower. In fact bankers said that for some of them, treasury operations would actually be incurring losses, due to a steep rise in yields of all government securities. Ten year G-sec yields have hardened by at least 1.5 per cent between March 31, 2004, and March 31, 2005.

As a result bankers have lost interest in treasury and have returned to core operations for generating profits. In fact, core operations are expected to sustain profits well into this year, bankers said. This loss of interest in G-sec trading was evident from the narrowing spread between G-sec yields and the interest rates on credits. This spread between AAA/ AA rated borrowers and G-secs was only about 200 basis points. Besides, during the last year, while G-sec yields rose, lending rates to corporates were mostly unchanged.

Besides none of the major banks have altered their benchmark prime lending rates, hovering between 10.5 per cent and 11.5 per cent. Most banks, however, were lending to top-rated corporates at discounts to the BPLR.

But bankers admitted that these recoveries would also result in greater tax liabilities. In fact, for the current assessment year, banks are expected to exceed the tax as well as the dividend estimates made by the Government. This was despite the reduced corporate tax rates.

But most public sector banks have already paid out liberal interim dividends to shareholders during the last fiscal, the greatest beneficiary of this largesse being the Government.

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