Bad loan hunting
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Reserve Bank of India’s (RBI’s) asset quality review is increasingly looking like a highly successful amnesty scheme for tax evaders: come clean with your hidden income or assets (bad loans in this case), and all shall be forgiven.
Over the weekend, six state-owned banks reported a combined increase in bad loans of Rs.24,622 crore in the March quarter. This is on the back of Rs.29,538 crore reported in the December quarter; that’s when the results of the RBI review became evident. The chart shows the spike for these six lenders, whose combined bad loans top Rs.1.3 trillion, in the last couple of quarters.
Their stocks took a hammering and investors were left with a spate of questions.
One, with the economy showing signs of improvement and even corporate earnings coming off their bottom, what explains this sudden surge in bad loans? It is not as if asset quality recognition norms have suddenly changed overnight. Clearly, bank managements till now were kicking the can down the road.
In fairness, some sectors such as iron and steel and infrastructure have not had it easy for the past many years. They have been the ones repeatedly highlighted by banks as responsible for the rise in bad loans. But only when RBI releases its next financial stability report will the true extent of the rot—and how widespread it is, if at all—be known.
Two, has the bleeding been stanched? Is this the bottom? The answer is a resounding no.
After a fashion, some of the bigger banks have started declaring asset quality watch lists. Bank of Baroda has said that it has suspect quality loans worth Rs.26,900 crore, of which 57% could potentially turn bad this financial year. While the others haven’t been as forthcoming, the big pile of restructured loans, those refinanced under the 5/25 scheme and loans under the strategic debt restructuring (SDR) process throw up enough red flags.
Union Bank of India, for instance, has an SDR portfolio of Rs.1,840 crore, Rs.2,500 crore under 5/25 and Rs.8,500 of standard restructured assets.
The net result of this car wreck is losses and the erosion in net worth. Five of these six PSU banks—with the exception of Union Bank of India—reported losses. Together, they topped Rs.7,000 crore. (To be sure, extra provisions mandated by RBI towards Punjab food credit were also responsible for an increase in provisions).
Even if the bad loan pile-up ends here, banks’ problems don’t. Many state-owned banks have a precarious capital position. UCO Bank, for instance, has a capital adequacy ratio of 9.63% at the end of March and Central Bank of India 10.4%. Recapitalization from the government appears woefully inadequate under its declared plan. Raising money from the market is an option, but who will subscribe?