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Business News/ Market / Mark-to-market/  L&T Finance faces asset quality problems
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L&T Finance faces asset quality problems

Gross non-performing loans stood at 3.18% in the March quarter compared with 2.93% three months earlier

Of the `177.8 crore bad loans in the three months to March, the wholesale division was responsible for a 85% share.Premium
Of the `177.8 crore bad loans in the three months to March, the wholesale division was responsible for a 85% share.

L&T Finance Holdings Ltd’s March quarter earnings were a mixed bag. The firm continued to grow its loan book at a 20% rate, but the weak economy has led to a deterioration in asset quality and the pace of disbursements.

As a proportion of the loan book, gross non-performing loans stood at 3.18% at the end of March compared with 2.93% three months earlier. The drop in asset quality was spread across segments, but was especially sharp in the wholesale division, which lends to the infrastructure sector.

Of the 177.8 crore bad loans in the three months to March, the wholesale division was responsible for a 85% share. Gross non-performing assets (NPAs) in this segment jumped to 3.18% of loans compared with 2.4% at the end of December.

While the firm sold 128 crore of bad loans to asset reconstruction companies, it said additional slippages led to a rise in overall NPAs. With a further 6.8% of this loan book having been restructured, total stressed assets amount close to one-tenth for the wholesale segment.

The outlook for this segment hinges on an economic recovery and structural reforms in the infrastructure sector. About 45% of the loan book is exposed towards power companies (both as corporate and project loans), which are not facing the best of times. Falling capacity utilization and plant shutdowns mean the NPAs are going to stay for some more time. The problems of the infrastructure sector have hit disbursements as well, which grew at less than 1% over a year ago in the March quarter.

This weakness in disbursements wasn’t restricted to the infrastructure loan book. Growth in the retail and mid-market loan disbursals slowed to 8.5% from a year ago in the March quarter compared with 12.4% in the first nine months of financial year 2014. That was mainly owing to restricted lending to the commercial vehicle and construction equipment segments with a view to contain bad loans. Most of the other segments continued to show growth and helped drive margins. However, in this segment, too, sustained growth will depend on a turnaround in the economy and fall in interest rates.

The improving net interest margins in the retail lending business and loan book growth helped offset the increase in provisioning expenses. Thus, L&T Finance Holdings posted a 9% increase in net profit, beating Street expectations. But the firm has to bring asset quality under control and wait for lower interest rates—something which depends on the economy—for its stock to beat the broader market.

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Published: 23 Apr 2014, 09:13 PM IST
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