Banks’ asset quality woes not over yet
35 of 38 listed banks that have so far reported March quarter results posted a 26.6% rise in gross bad loans to Rs6.41 trillion from a year earlier
Mumbai: The bulk of asset quality recognition for public sector banks is over at the end of March quarter, but analysts spot no encouraging trends yet.
During the quarter, outstanding public sector bank loans grew 1.1% year-on-year to Rs69.71 trillion, while that at private sector banks grew 14.5% to Rs21.47 trillion. Multiple analysts attributed the slower advances growth at public sector banks to Ujwal Discom Assurance Yojana (UDAY), a power sector bailout scheme, under which many power utility loans have been converted into investments.
“Sluggish growth of public sector banks can also be attributed to tepid demand for corporate credit and their higher mix compared to private. Compounding the issue is lack of growth capital with most of the public banks. The retail engine is not well-oiled as their private counterparts. In our view, mid-size public sector banks would continue to struggle and our outlook on them remains negative,” said Udit Kariwala, financial institutions analyst at ratings company India Ratings.
Thirty-five of 38 listed banks that have reported earnings till Friday for the March quarter posted a 26.6% rise in aggregate gross bad loans to Rs6.41 trillion from a year earlier, according to data compiled by Mint. (This figure doesn’t include about Rs67,000 crore bad loans of the erstwhile associate banks of State Bank of India which have been merged with India’s largest lender).
The number is 5.25% higher than those reported in previous quarter.
“Resolutions for large accounts will take place in financial year 2018 which will help in boosting credit demand,” said Alpesh Mehta, an analyst at Motilal Oswal Securities. “Banks are under the radar of the central bank to improve their efficiency levels.”
Reserve Bank of India (RBI) has so far placed UCO Bank and IDBI Bank under its prompt corrective action (PCA) framework, meaning restrictions in extending loans and expanding network, among others. It is expected that more banks will come under this framework.
Mint research shows that Indian Overseas Bank, Dena Bank, Allahabad Bank and Central Bank of India can also fall under PCA framework based on their March quarter results.
The central bank is looking to consolidate public sector banks to create healthier lenders and has spoken of even re-privatizing them to reduce the amount of capital that the government needs to infuse in them.
“Consolidation of public sector banks is not an answer for solving the asset quality challenges of current stock of stressed assets, it could add value in terms of incremental growth. Successful consolidation remains a challenging task,” added Kariwala.
Twenty-nine of the 35 banks that have reported earnings till Friday have also seen gross NPAs rise from the December quarter, according to the data compiled by Mint.
Asset quality at Indian Overseas Bank continued to remain the worst among peer lenders. The bank reported a gross NPA ratio of 22.39% compared with 22.42% in the December quarter. IDBI Bank showed a sharp jump in gross NPA ratio to 21.25% in the March quarter against 15.16% in the December quarter.
Private sector banks such as Yes Bank, ICICI Bank and Axis Bank saw divergence in their gross performing loans as per RBI assessment, given their large corporate loan book exposure. Yes Bank’s non-performing asset (NPA) classification as of March 2016 varied from that of RBI’s by Rs4,176 crore, whereas for ICICI Bank and Axis, the divergence stood at Rs5,105 crore and Rs9,478 crore, respectively.
The government on 5 May notified an ordinance to amend the Banking Regulation Act, giving RBI wider powers to deal with specific cases of bad loans. Most of India’s stressed assets issue are confined to 50 large accounts.
“The ordinance will create problems for private sector banks and we can see higher divergences for them since the management intention is to keep the share price up. For public sector banks, recognition of asset quality problem is almost over, but due to higher provisions, profits will remain at lower levels,” said a banking analyst requesting anonymity.
Net profit more than doubled at State Bank of India (SBI), the country’s largest lender. The bank expects credit costs to remain “slightly elevated” in the current year as stressed asset resolution accelerates.