With the NPA norms made more strict from the current financial year, total NPAs of banks are expected to go up by around Rs 45,000 crore. This, in turn, would lead to greater provisioning for banks and would also put pressure on their profits. Coupled with this is the fact that banks are not getting good avenues to deploy their funds.In an effort to enforce stricter norms as far as NPAs are concerned, the RBI has laid down new guidelines whereby from the current financial year a default in payment of interest for one quarter would be treated as NPA instead of the earlier norm of default for two quarters. Officials in Punjab National Bank (PNB), Bank of Baroda (BoB), Canara Bank and Union Bank of India pointed out that after the enforcement of the new guidelines for NPAs, total NPAs of the banking industry is expected to go up by around Rs 45,000 crore. According to official estimates, total NPA of the banking sector stands at around Rs 90,000 crore which, according to some rating agencies, is anyway underestimated.Bank officials said that with the new NPA guidelines, provisioning of the bad debts for the banks would also go up and this would be reflected on the balance sheet. Bank officials said that unlike PSU banks, foreign banks first construct assets and then go out looking for liabilities to match the assets. In the case of PSU banks, the liabilities are already there and hence the cost of servicing the liabilities would continue even in the absence of good assets to deploy the funds. The time gap between the assets and liabilites eat into profits. This would also reflect adversely on the profits of the banks.Bank officials also pointed out that with the RBI sending clear signals of further reduction in the interest rate through the recent rate cuts and further with the apex bank pumping in more money in the banking sector through a reduction in the CRR, not only would there be surplus money in the banking sector but there would be squeeze on the interest spreads of the banks. It would be a takers market, bank officials said.Another cause of worry for the leading public sector banks is the recent increase in the number of frauds and defaults in housing finance. Most of the leading PSU banks, including PNB and SBI, are into housing finance. According to bank officials, the RBI has also circulated a note among the banks advising the banks to adopt a cautious approach as far as lending in the housing finance sector is concerned. Since the interest rate is low (at present average lending rate in the housing finance sector is around 9 per cent), the consumers tend to take it a bit easy in repaying the loans. The consumers tend to settle dues with steeper interest rates first ie, credit cards and then think of repaying other loans. In fact, there is a consideration within the banking circle that the IBA should take up the issue of commercialising the rate of interest on credit cards with the RBI, banking sources pointed out.
