The worst is far from over for the Indian banking sector, notwithstanding the promises of a reforms-led economic turnaround and the hopes of a rate cut on Tuesday. All hopes of an improvement in asset quality were dashed with the latest set of bank earning numbers published on Friday.
For the 20 banks that have declared their September quarter earnings, bad loans rose sharply in the past three months. Collective gross non-performing assets (NPAs) for this set of banks rose by Rs.7,219 crore, or 14.3%. The run rate of bad loan accumulation was sharper than in the June quarter, when gross bad debts rose by Rs.3,340 crore, or 7%.
The main culprits, as has been the case in the past several quarters, were state-owned banks. Punjab National Bank saw its bad loans rise by Rs.4,035 crore, or 40%, in the past three months. Bank of Baroda saw bad loans increase by one-tenth in the September quarter and Indian Overseas Bank’s rose by one-fifth.
Rs.1,737 crore in the September quarter, more than the Rs.728 crore slip seen in thee months ended June.
One reason for the slightly lower accumulation to slippages in the June quarter was perhaps the banks preferred to restructure loans. With gross bad debts increasing, it is expected that recast loans won’t grow at a similar rate. While that holds for some private sector lenders such as Axis Bank Ltd and ICICI Bank Ltd, it’s not true for state-owned banks.
Punjab National Bank restructured assets worth Rs.2,720 during the quarter, compared with Rs.1,250 crore in the preceding three months. Indian Overseas Bank’s loan recasts in September amounted to Rs.1,407 crore, compared with Rs.425 crore in the June quarter. Bank of Baroda, too, followed pretty much the same trend. “Slippages include two large accounts of Rs.2,000 crore each and sectoral NPAs indicate significant slippages in BoB’s retail portfolio as well,” brokerage Prabhudas Lilladher said in a note.
This rise in stressed assets is all the more disturbing since loan growth is slowing. It is also responsible for collective net profit growth to slip to an annual 18% in the September quarter, compared with a 23% growth in June.
To be sure, state-owned banks lend to a wider spectrum of consumers and that could be one reason why their bad debts are increasing sharply. But the continued economic sluggishness, a pick-up in corporate capital expenditure still far away and the country still facing rating agency downgrade threats, it is hard to believe this trend will stop soon.