Why to avoid PSU Banks in short term?

India’s backbone and the business productivity is dependent on Agriculture and rainfall, as like the same India’s Economical backbone are Banks. But now there is a problem to the Economic backbone. Public Sector Banks are under pressure due to their NPA (Non-Performing Asset). As comparing with the previous year 51% of NPA in banks has been increased. Lets see below in detail.

PSU Banks are in trouble due to high NPA outstanding

Dhanalakshmi Bank, South Indian Bank, Allahabad Bank, Andhra Bank are the top performers of NPA in this year. NPA has been raised doubled comparing with previous year. Indian Bank, Indian Overseas Bank , Federal Bank, Punjab and Sind Bank’s  NPA has been raised more than 100%  this year which is a very critical news for those banks. In vice-versa compared to last years NPA the banks like Yes Bank and ING Vysya Bank has been reduced to half and their recovery ration has been increased a lot. There are lot of companies have borrowed from banks and their timely repayment fails leads to NPA, in this way many of the companies near about 106 companies are asking for Restructuring(Asking extension of time). In this financial year alone 76470 crore are taken into NPA account. Comparing to last years data only 50 companies has asked permission for Restructuring.

Like this Restructuring the ratio to change as NPA is more and from April 1, 2015 RBI going to include all the company names directly to NPA. And also from June 1, 2013 RBI decided to correct the provisional rate from 2.75% to 5%  which going to be increase.  In China NPA ration is 25% and if the same happens here in India it will be very big problem to our country. Many experts analyse the NPA report from their point of view. One of the expert says that the Interest rates has been increased and the sales output decreased which is the main reason for the same. Due to Economic deficit people are going for some other investments other than Fixed deposits in banks. Due to attract deposits from people, banks are in a condition to give high interest and also in turn they are forced to ask high interest to the money lended to companies and people.

Main Reason for NPA is loans provided to high risk sectors

Other main reason for big NPA is the loans given to high risk sectors like Real Estate, Infra, Metal these are fields in which many banks lended to companies.  If NPA is raised banks capital need to be infused from outside. So due to this the profit for the bank will be reduced. Loans for new comers and existing entrepreneurs will not get loans that much easily. A Bank has been allowed to have NPA has upto its interest rates borrowed. Commonly if a bank has its 95% cash balance in  flow and 5% with its usual operating costs, if the NPA increases bank will be in loss. If the NPA should decrease means the only reason is to decrease the interest rates is the only main major reason to recover all NPA.

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