It was in November 2014 that
Last week, Axis Bank defied the age-old industry practice by disclosing the potential bad loans rather than dressing them up, meanwhile gaining more confidence from investors.
Soon, ICICI Bank followed suit and declared that because of a miserable performance, its top management would let go of their bonus.
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This happened despite the fact that both banks went several layers down with their net profit, as they had to set aside a huge amount as provisions for NPAs, seeing RBI’s demand of an asset-quality review, which imposed standard norms for recognition of bad loans in the industry. Even with the huge fall in profits, the banks gave a detailed disclosure about the amount of potential bad loans.
"By making greater disclosures, banks are hoping that investors and analysts can ascertain the size of the problem, which can give us a fair idea of the downside risk," Anoop Bhaskar, head of equities, IDFC Mutual Fund, told ET.
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On April 26, Axis Bank announced putting corporate loans worth Rs 22,600 crore on its 'watch list', since they could turn out to be wicked in the future. These loans have been spread across various sectors and projects, which could have downgraded ratings, inconsistent payment records and restructured accounts. As per Axis Bank, 60% of these loans can be expected to become NPAs in two years, with a majority in the first half of this fiscal year itself.
ICICI, on the other hand, has declared Rs 44,000 crore of risky loans, given to various sectors like power, mining, iron and steel, cement, and rigs. However, it did not give an estimate of the amount that it expects to slip into NPAs.
These disclosures look like an attempt to prevent even good loans from being painted with the same brush.
"We want to make sure that people get comfortable that this growth is healthy. We want to compartmentalise and give people comfort that what we are doing now... is extremely healthy. Because, in any environment, the best credits are ultimately made in a bad environment," said V Srinivasan, executive director, Axis Bank.
This move has been welcomed with open arms by both investors and analysts, since it enhances transparency in dealings. "Before these disclosures, there was always a doubt on whether banks like Axis and ICICI were revealing the full amount of damage while public sector banks were biting the bullet. Those doubts will slowly be put to rest," said Purvesh Shelatkar, head of research at BoB Capital Markets.
This new practice of transparency in the Indian banking industry could pave the path of a new chapter to fuel the economic growth and earn investors' goodwill.
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