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NPA woes to linger through 2016-17, predicts Morgan Stanley

Brokerage house Morgan Stanley has said Reserve Bank’s asset quality review (AQR), which led to a higher provisioning for bad loans, is not the “panacea” and the system will continue reporting stress in 2016-17 as well.

“A multiple of 15x probably signifies asset quality stress is unlikely to abate in 2016-17 from the current elevated levels… AQR is not the panacea for the sector,” the brokerage said in a note on Thursday.

“The AQR process was good and forced banks to recognise stress. But the problem is much bigger than just 2 per cent of loans, which were recognised as bad loans.”

It focused on recent results of private lender Axis Bank, which recognised the entire impact of the review in the December quarter itself rather than the two quarters allowed by RBI. The lender reported a dip in net income for the first time in over 11 years and also warned that pressure on asset quality would continue.

Axis Bank has placed over Rs 22,000 crore of corporate loans under the watch-list of stressed accounts, which is 4 per cent of its book, and warned that 60 per cent of this might turn bad.

The findings are contrary to investor expectations that the asset quality cycle has bottomed out and 2016-17 is in for some improvement.

Morgan Stanley explained that RBI probably focused only on loans that are already NPAs, but banks did not report them as such.

Implementation of RBI recommendations led to Bank of Baroda and IDBI Bank reporting worst quarterly numbers ever in the December quarter and IDBI warning of more such pressure to follow. BoB had said it was done with all provisioning under AQR in December itself.