Bad loans: Is the worst over for Indian banks?

Demonetisation will be an impetus for banks whose clean-up exercise—setting aside provisions for bad loans—have started showing effects


The flood of low-cost cash deposits following demonetisation will help banks bring down their loan rates and encourage them to lend. Photo: Indranil Bhoumik/Mint
The flood of low-cost cash deposits following demonetisation will help banks bring down their loan rates and encourage them to lend. Photo: Indranil Bhoumik/Mint

With everyone talking about the inconvenience caused to the masses and wealth destruction as a consequence of the demonetization of high-value banknotes and a few on the windfall for banks, it may not be a bad idea to revisit the bad loan situation in Indian banking.

Barring Jammu & Kashmir Bank Ltd, all banks have announced their September quarter earnings. How have they done? The collective net profit of 38 listed Indian banks in the quarter to September has been Rs12,425.46 crore, close to 28% less than the year-ago quarter but better than the June quarter. In three months ended 30 June, the net profit of all banks had been Rs8,678 crore. While private banks collectively recorded a net profit of Rs9,929 crore in the June quarter, public sector banks posted a Rs1,251 crore loss with 10 of them recording between Rs222 crore and Rs1,450 crore in losses.

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The earnings of IDFC Bank Ltd and unlisted Bandhan Bank were not taken into consideration for this purpose. While all private banks made profits in the September quarter, eight public sector banks were still in the red. In the June quarter, 10 of them had posted losses.

The reason behind the tepid growth in net profit in September is the continuous rise in bad assets. On a year-on-year basis, the gross bad loans of banks—both private and public sector—have almost doubled, from Rs3.37 trillion to Rs6.65 trillion. For Axis Bank Ltd and two State Bank of India associate banks—State Bank of Mysore and State Bank of Travancore—the rise in bad assets has been over three times in the past one year and the bad assets of 10 other public banks and ICICI Bank Ltd have at least doubled.

Naturally, they had to set aside money or provide for the bad loans. This has eroded their profits. The rise in provisioning for this set of banks has been a little over 80% in the past one year, from Rs25,396 crore to Rs45,821 crore.

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Private sector banks have been more aggressive in provisioning. Their provisioning has jumped three times in one year even as public banks’ provisioning has risen close to 50%. ICICI Bank’s provisioning zoomed more than seven-fold and that of Axis Bank more than five-fold in one year. Among public sector banks, at least seven banks’ provisioning has doubled. Even after such massive provisioning, which is less than their interest income but far higher than fee income, their net bad loans or non-performing assets (NPAs) have more than doubled in the past one year. For private banks, the rise has been 132% and public banks, 104%.

Among private sector banks, ICICI Bank has the maximum gross NPAs—6.28% of the loan book, followed by Axis Bank (4.17%). Indeed, Dhanlaxmi Bank Ltd has even more NPAs than ICICI Bank but that’s a relatively small entity. Among 24 public banks, 18 have between 10% and 21.77% gross NPAs. Indian Overseas Bank tops the list (21.77%), followed by Uco Bank (16.51%), United Bank of India (16.26%), Bank of Maharashtra (14.08%) and Dena Bank (13.79%). Two large public sector banks—Punjab National Bank and Bank of India—have more than 13% gross NPAs.

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When it comes to net NPAs, ICICI Bank tops the list of private sector banks (3.57%) and Indian Overseas the public banks (14.3%). Only one public sector bank has net NPAs in double digits—United Bank of India, at 11.19%.

However, the earnings of two quarters do not give us a complete perspective. To examine whether the health of the banking system is improving, we need to take a look at how they have been doing in the past one year, on the NPA front. Between August and December 2015, the Reserve Bank of India had inspected the loan portfolios of all banks and asked them to set aside money for three kinds of loans—NPAs that they had not recognized yet; loans given to projects where the dates of commencement of commercial operations had passed but the projects had failed to take off; and restructured loans. The banks had to provide for the first two types of loans in two phases in the December and March quarters of fiscal year 2016, at least 50% each. For the restructured loans, they were asked to make 15% provision in six quarters, 2.5% each, till March 2017.

So, theoretically, all banks were through with recognizing NPAs and providing for them by March 2016 even as they will continue to provide for their restructured assets till March 2017, by when the entire clean-up exercise gets over.

Data compiled by Ashwin Ramarathinam of Mint Research Bureau shows that in absolute term, the gross NPAs of 38 listed banks sequentially or on a quarter-on-quarter have risen 6.44% in the September quarter, lower than 8.87% in the June quarter, and around 32% rise in both March and December 2015 quarters.

In other words, it has been coming down. Indeed, some of the associate banks of the State Bank of India have gone for a clean-up ahead of a merger with their parent and announced a massive rise in bad loans. Axis Bank too witnessed a 71% jump in gross NPAs.

The provisions figures of the industry are not uniform. There has been a little over 8% rise in provision in the September quarter after a 45% drop in June. In the March quarter, provisions had risen 57% and in December 2015, 98%.

Indeed, 19 of the 38 banks have provided less in the September quarter but for quite a few, the rise has been pretty steep. For instance, ICICI Bank has provided 182% more in the September quarter than what it had done in the three months ended June. For Axis Bank, the rise has been 71%. While some banks had not made enough provisions in the June quarter, presuming things were getting better, others have actually seen an improvement in asset quality.

After provisions, the rise in net NPAs in the September quarter has been 4.81%, half of what we had seen in the June quarter (9.13%) and much lower than the 34.62% rise in March and 33.65% rise in December.

Indian banks are not yet out of the woods, but the trend seems to be encouraging. There have been many slippages from the so-called watchlist of banks but the good news is that most banks are keeping a close watch on their bad assets. There is no escape from this as they need to clean up their balance sheets in the next two quarters.

The flood of low-cost deposits following demonetization will help them bring down their loan rates and encourage them to lend. That will help both consumers as well as the banks.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.

His Twitter handle is @tamalbandyo

Comments are welcome at tamal.b@livemint.com

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