Bad loan woes continue for state-run banks

Indian Overseas Bank, Uco Bank report losses in the June quarter, profit at United Bank of India falls; gross non-performing asset ratios rose at all three banks

Most PSU banks that have reported their results so far have seen some impact of higher provisioning and increased bad loans. Photo: Pradeep Gaur/Mint
Most PSU banks that have reported their results so far have seen some impact of higher provisioning and increased bad loans. Photo: Pradeep Gaur/Mint

Mumbai/Kolkata: Three more state-owned banks reported troubling news on the bad loan front on Tuesday, adding to uncertainty on whether the worst is over yet for the country’s lenders.

While both Indian Overseas Bank (IOB) and Uco Bank reported losses in the June quarter, profit at United Bank of India fell. Gross non-performing asset (NPA) ratios rose at all three.

Chennai-based IOB fared the worst, with a fifth of its gross loans turning bad. Gross NPAs as a ratio of gross advances were 20.48% at the end of June, higher than the 17.4% reported three months earlier.

ALSO READ | Indian Overseas Bank posts Rs1,450.50 crore quarterly loss

This is the highest gross NPA ratio reported by an Indian lender in 13 years. According to Capitaline data, the last one to report a higher figure was IDBI Bank Ltd, which reported a gross NPA ratio of 29.9% in December 2003.

IOB’s bad loan ratio has been deteriorating for a while now. On 5 October 2015, the banking regulator called for corrective action at IOB to check bad loans, improve internal controls and consolidate its business activities.

The move came after the bank’s gross bad loans ratio widened to 11% of its gross advances at the end of the September 2015 quarter.

In absolute terms, gross NPAs at the end of June were Rs.33,913 crore, up nearly 13% from Rs.30,048.63 crore at the end of March. After providing for bad loans, the bank’s net NPA ratio was still elevated at 13.97% at the end of the June quarter.

IOB reported a Rs.1,450.50 crore loss for the quarter ended 30 June against a net profit of Rs.14.76 crore a year ago. The bank set aside Rs.2,137.81 crore as provisions for bad loans for the June quarter, against Rs.2,666.16 crore in the March quarter and Rs.663.57 crore a year ago.

The bank also used Rs.170 crore out of its countercyclical buffer against bad assets, it said in the notes to its profit and loss account. Countercylical buffer is money set aside during profitable years which can be used in leaner times.

Net interest income, or the difference between interest earned on loans and that spent on deposits, fell 6.3% from a year ago to Rs.1,245.07 crore. Non-interest income rose 22% to Rs.653 crore.

IOB’s capital adequacy ratio, a measure of bank financial strength expressed as a ratio of capital to risk-weighted assets, dropped to 9.47%, below the limit of 9.625% set by the Reserve Bank of India in the quarter. The capital adequacy number a year ago was 9.75%. But the bank said if the Rs.1,551 crore capital infusion from the government was included, the ratio would increase to 10.37%.

“This is easily the most disappointing result among public sector banks. The government’s proposed capital infusion might push the bank above the regulatory limit, but it will still not be enough for business growth. Any business expansion plans will require more funding from the market, which looks difficult,” said Siddharth Purohit, senior banking analyst, Angel Broking Pvt. Ltd.

ALSO READ | What went wrong at Indian Overseas Bank

The numbers from IOB may be the worst, but the bank is hardly alone.

On Tuesday, Kolkata-based Uco Bank declared a net loss of Rs.440.56 crore in the June quarter, against a net profit of Rs.256.7 crore a year ago. Its gross NPA ratio touched a record 17.19% from 15.43% at end-March and 7.30% in the year-ago period.

The bank reported fresh slippages—new loans turning bad—of around Rs.3,116 crore during the quarter. Slippages during the same period last year was Rs.1,252 crore. Total income fell 8.53% to Rs.4,727.93 crore from Rs.5,169.09 crore a year ago.

Provisions against bad loans rose to Rs.1,250.50 crore from Rs.765.56 crore in the same period a year ago.

To reduce risks, the bank is scaling back lending to large companies. Commitments already made will be honoured, but it is going to be “selective” when considering new loan proposals, said Charan Singh, executive director. Sectors such as steel, power and infrastructure are the biggest source of NPAs, with five companies accounting for as much as Rs.1,300 crore of fresh slippages during the June quarter, said managing director and chief executive officer R.K. Takkar.

According to Takkar, loan recovery and asset quality upgrades during the quarter amounted to Rs.1,427 crore, against Rs.600 crore a year ago.

Takkar said both advances and deposits fell during the quarter.

ALSO READ | Banks are ill, long live NBFCs

Capital adequacy ratio fell to 9.9% from 11.71% a year ago. The bank said the Union government would infuse around Rs.1,030 crore this fiscal. It plans to raise Rs.600 crore as tier II capital and another Rs.2,000 crore as additional tier I capital. The bank has also put bad loans worth Rs.1,767 crore on sale.

United Bank of India, also based in Kolkata, reported a 26.6% fall in quarterly net profit to Rs.38.32 crore from Rs.52.22 crore a year ago.

The bank’s asset quality worsened, with gross NPAs rising to 14.29% of gross advances, up from 9.57% a year ago. In absolute terms, gross NPAs rose to Rs.10,116.13 crore from Rs.6,532.83 crore.

The bank set aside Rs.378.30 crore in the June quarter to cover bad loans, lower than Rs.493.58 crore a year earlier.

Among the three banks, IOB’s story has been in the making for long, thanks to unchecked loan growth since 2010. While the bank took 74 years till 2010 to reach a loan-book size of Rs.80,782 crore, that number more than doubled to Rs.1.81 trillion in the next four years when M.Narendra was its chairman and managing director.

A month after he took the helm of IOB in late 2010, Narendra talked publicly about his plans to expand its total business (deposits and loans) to Rs.2.5 trillion by the end of the financial year. That meant the bank had to add about Rs.40,000 crore in four months.

Narendra exceeded his target; IOB had total business of Rs.2.59 trillion as of 31 March 2011. Most of the business growth, Mint had reported in December last year, came at the cost of weaker risk management practices.

To be sure, these are not the only banks which have reported weaker results during the first quarter. Most public sector banks that have reported their results so far have seen some impact of higher provisioning and increased bad loans.

New Delhi-based Punjab National Bank has reported a net profit worth Rs.306 crore in the April-June quarter against a profit worth Rs.720 crore a year ago. Gross NPA ratio for the bank during the first quarter was at 13.75% compared with 12.9% in January-March period. State Bank of Travancore reported a net loss of Rs.743 crore in the April-June period, as compared with Rs.81.32 crore a year ago. Similarly, Syndicate Bank reported a 74% year-on-year drop in its net profit, which was at Rs.79 crore as on 30 June, primarily due to increased provisioning against bad loans.

also read | Punjab National Bank: the devil is in the details

Shares of IOB fell 0.73% to Rs.27.30, Uco Bank slid 0.58% to Rs.42.75 and United Bank rose 0.68% to Rs.22.1 on a day the benchmark Sensex fell 0.35% to 28,085.16 points.

PTI contributed to this story.