The March 2016 quarter will go down as one of the worst in the history of Indian banks as losses piled up and bad loans tumbled out of their cupboards. The five key takeaways are:
1) The central bank-instituted asset quality review’s full blast was spread over the second half of the year. Indian lenders added Rs.1.4 trillion in bad loans over the course of January to March. This comes on the back of Rs.97,404 crore bad loans addition in the December quarter. All said, gross bad loans for listed banks stood at Rs.5.8 trillion at the end of March, or about 8% of non-food credit. For state-owned banks, this ratio hovers close to 10%. This doesn’t include restructured assets, which in many cases, would add half as much more to their stressed loans portfolio.
2) The surge in bad loans was not restricted to public sector banks. Even big private lenders such as Axis Bank Ltd and ICICI Bank Ltd saw a sharp rise in bad loans, indicating that the rot runs deep. What’s more, the clean-up is not complete. Many banks have declared watch lists of assets—a good percentage of which they expect to go bad this year. For Axis, this was around Rs.22,000 crore and ICICI Rs.52,000 crore. Among state-run lenders, State Bank of India has declared Rs.31,000 crore worth of loans sensitive and Bank of Baroda about 27,000 crore.
3) This big pile-up of bad loans necessitated higher provisions. Over the course of the year, banks had to set aside some Rs.1.75 trillion towards bad loans. Thus, the listed universe of banks in India ended up with losses of Rs.14,685 crore in the March quarter. This number is boosted by private bank profits. The combined losses of state-owned banks were higher at Rs.23,493 crore after a Rs.10,793 crore loss in October-December.
4) These losses meant net worth got hit. For 25 state-run banks for whom data was available, net worth fell by Rs.65,350 crore, or 11.5%, in the six months to March. While the central bank had relaxed some provisions for recognizing capital, this kind of continued losses will start affecting their prudential ratios. For about one in three banks, stressed assets (net bad loans plus one-third of restructured loans) are higher than their net worth.
5) With a precarious capital position, banks will find it difficult to expand lending. The current recapitalization plan of the government—about Rs.25,000 crore in a year—is not enough. Of course, there is a chance that many of these bad loans will be upgraded once the economy recovers and borrower firms generate cash. The wait for an economic recovery continues.