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India Ratings:Added focus on agri-loans may spike NPAs further

India Ratings has warned that the added focus on farm credit may keep the record high bad assets of state-run banks at elevated levels.

Last Updated: Jul 03, 2013, 09.50 PM IST
MUMBAI: Domestic rating agency India Ratings has warned that the added focus on farm credit -- a 22 per cent spike in agri lending -- in the Budget may keep the already record high bad assets of state-run banks at elevated levels, offsetting the impact of proposed Rs 14,000-crore capital infusion.

Terming the Budget as a mixed bag for the state-run banks and good for private lenders, India Ratings senior director Ananda Bhoumik said, "Though the Budget will benefit government banks through Rs 14,000 crore equity infusion and gradual easing in stress on infrastructure loans by a way higher tax-free bond issuance, the continued focus on growth in agri credit may keep bad loan levels elevated."

NPAs from the farm front have been amongst the highest this fiscal for the public sector banks.

On a y-o-y basis, gross NPAs have grown by 42.6 per cent from Rs 1.28 trillion as of December 2011 to Rs 1.83 trillion as of December 2012. NAPs in percentage terms rose from 2.88 at the end of December 2011 to 3.53 as of December 2012, as per a recent report by Care Ratings.

Budget contemplates a steep 21.7 per cent rise or Rs 7 trillion in farm credit next fiscal over the current fiscal.

However, Bhoumik says the private lenders got a big leg-up from the Budget and have benefited more as it creates a level-playing field by extending them the interest subvention scheme for farmers. This will improve their competitiveness in rural areas, he noted.

According to him, overall additional Rs 1,00,000 tax deduction on interest-paid home loans up to Rs 25 lakh for first-time home buyers, is a positive for banks as whole. Bhoumik says another positive is the proposal to set up a roads regulator, as this will to some extent ease stress on banks from their infra lending books.

"Asset quality pressure may ease if investments and thus growth is stimulated by the proposed investment allowance."

Bhoumik also said the plan to allow banks to act as insurance brokers will boost their fee income. Also, trading income could be boosted if the bond market reacts positively to the finance minister's commitment to lower the fiscal deficit, though the detailed calculations of bringing the deficit down need to be examined.
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