State Bank of India’s (SBI’s) June quarter numbers are a reflection of the macroeconomic gloom surrounding Indian firms. The bank’s gross non-performing assets (NPAs) have shot up by Rs.9,702 crore, or 19%, since the end of March. As a proportion of advances, gross bad debt stood at 5.56%, the highest in at least eight years.
To be sure, India’s largest bank is not alone in reporting such numbers. The gross NPAs of 22 public sector banks grew 51% from a year ago to Rs.1.2 trillion in the June quarter. In short, the rise in SBI’s NPAs is a sign that, far from the economy having reached a bottom, the health of Indian firms continues to deteriorate sharply.
SBI reported fresh slippages worth Rs.13,766 crore in the three months ended June, almost the same as it had reported for the December and March quarters put together. On the other hand, it was able to upgrade only Rs.1,519 crore of loans in June, the lowest in the past five quarters.
Sure, there has been some let up in the volume of renegotiated loans. The bank restructured Rs.5,000 crore of loans in the three months ended June, compared with Rs.8,669 crore in the March quarter. But an increasing amount of recast loans, too, are slipping into the NPA category. About 26.4% of its restructured loans are in the NPA category compared with 25.3% three months ago. Taken together, recast and bad loans amount to 8.57% of SBI’s advances.
This steady rise in bad assets mirrors the wider malaise in the economy. While the majority of this increase in bad loans comes from the high-risk small and medium enterprise and agriculture portfolios, other industries are slipping as well.
For instance, SBI’s large corporate portfolio has an NPA ratio of 1.7% now, a 1.5 percentage point rise from a year ago. The mid-corporate segment has one of the highest bad loan ratios at 9.47%. These are among the fastest growing loan categories for the bank in the last couple of quarters.
This rise in bad loans has walloped the bank’s operating performance as well. The management laid the blame for a poor 3.5% increase in net interest income on the fact that they are no longer collecting dues from NPAs. A fall in low-cost current and savings account (Casa) deposits as a portion of the total also squeezed net interest margins. On the other hand, pension expenses have doubled and the bank’s cost-to-income ratio has gained by 8.7 percentage points from a year ago. Thus, operating profit fell 7.6% from a year ago.
The fall was curbed at this level owing to the cushion provided by 28% gain in non-interest income. Those gains were entirely from treasury income, as fees declined. Again, while the bank provided Rs.531 crore for marking down the value of some foreign investments, it crimped on loan loss provisions. As a result, its provision coverage ratio declined from 66% to 60.6% three months earlier. Bereft of the treasury income, and the rejigging of provisions, the net profit decline would have been greater than the reported 13.6%.
The road ahead looks bleak. Reserve Bank of India’s (RBI’s) tightening started only in mid-July and the finance minister’s statement in Parliament on Monday to combat the external vulnerability hasn’t inspired much confidence. The continuing contraction in manufacturing as shown by the July index of industrial production and the PMI indices indicate that the situation will likely get worse, leading to more bad loans.
Already, several brokerages and rating agencies have pared their economic growth forecasts. Rating agency Standard and Poor’s, meanwhile, expects the industry’s bad loans to swell to 3.9% of loans by the end of this fiscal year and to 4.4% by fiscal 2015, from 3.4% in the year ended March.
For SBI, which accounts for one-fifth of the listed banks’ advances and nearly 30% of bad loans, the effect is a bit magnified. Its stock has fallen to a level last seen almost 21 months ago. In the interim, the Bankex has gained 17.7% and the Sensex 20.8%.