BackWhat is wrong with India’s banks?
For as many as 29 of the 40 listed banks, September-quarter net profit is lower than that of the preceding three months
Premium
Forty listed Indian banks’ collective net interest income—the difference between what they earn on giving loans and what they pay to depositors—rose by at least 13% in the September quarter from a year earlier. Their so-called other income, or earnings from fees, commission and treasury operations, too, rose around 9%. Despite that, collective net profit of the 40 listed banks dropped close to 25%, to around ₹ 14,000 crore in September quarter from ₹ 18,647 crore in the same month last year.
How to explain this? Well, it has happened because they had to set aside more money to take care of rising bad assets. There has been a 63% jump in provisions for bad loans—to ₹ 21,223 crore from about ₹ 13,000 crore—as the economy grew at its slowest pace in a decade last fiscal year and corporations struggled to stay fit and repay borrowings. The banks have been forced to set aside such a massive amount of money because their gross bad assets have risen close to 37% in the September quarter from a year earlier, to ₹ 2.29 trillion from ₹ 1.67 trillion. Even after setting aside so much money, their net bad assets are up close to 51%, from ₹ 85,000 crore to ₹ 1.28 trillion.
In percentage terms, seven banks now have more than 5% net non-performing assets (NPAs) of their loans and two have close to 5% net NPAs—reminiscent of the late 1990s when banks were struggling to put their houses in order amid a severe liquidity crunch. Kolkata-based United Bank of India has posted the maximum gross NPAs (7.52%), followed by Central Bank of India (6.47%), State Bank of Mysore (5.96%), State Bank of India (5.64%) and Uco Bank (5.32%). Two private banks in the list are Dhanlaxmi Bank Ltd (5.31%) and Lakshmi Vilas Bank Ltd (5.22%). Similarly, after setting aside money, seven banks now have at least 3% or more net NPAs. Here too United Bank of India tops the list, with 5.39% net NPAs.
The point to note is that most banks, particularly in the public sector, have been showing a secular growth in bad assets, although the bad loans data, both in percentage terms as well as in absolute numbers, do not provide the correct picture. This is because banks have been restructuring many of their stressed loans, which is not reflected in their NPAs. If one-fourth of such restructured loans turn bad, gross NPAs of many more banks will cross 5%. At least for a few of them, it could inch towards double digits.
The rising bad debts and, consequently, higher provisions for such debts, have taken a toll on the profit of banks. Three of them have announced losses in the September quarter and 20 of the rest 37 banks have shown massive erosion in net profits. Central Bank of India tops the list with a ₹ 1,508.74 crore loss, followed by United Bank of India ( ₹ 489.47 crore) and Dhanlaxmi Bank ( ₹ 1.85 crore). Many banks have shown a drop in net profit and, for a few, it has been quite hefty. For instance, Mangalore-based Corporation Bank’s net profit has dropped 96%—from ₹ 405.71 crore to ₹ 15.47 crore. In the case of State Bank of Mysore, it is 79.3%—from ₹ 145.35 crore to ₹ 30.08 crore and that of Andhra Bank, it is 78.3% (from ₹ 325.63 crore to ₹ 70.65 crore). One more public sector bank has posted more than 70% drop in net profit—Bank of Maharashtra. In this case, net profit has dropped 71.8%, from ₹ 166 crore to ₹ 46.85 crore. Among private banks, Karnataka Bank Ltd’s net profit has dropped 75.3%—from ₹ 117.19 crore to ₹ 28.95 crore.
For as many as 29 of the 40 listed banks, the September-quarter net profit is lower than that of the preceding three months. This is a critical pointer as typically, in the first quarter of any fiscal year, banks’ net interest income is the lowest as corporations do not rush to borrow in the beginning of a financial year. As the year progresses, the loan books of banks swell and their interest income rises. Still, most banks have failed to show sequential growth in net profit in the September quarter because their bad loans have risen.
Investors are well aware of what’s happening in the banking sector and those who have not been able to manage their bad loans are punished. From April, the Bankex, an index of 13 large listed banks on the BSE, has lost 5.42%, while the benchmark equity index, Sensex, has risen 8.3%. Since January, the Bankex’s fall has been even sharper—14.07%—against Sensex’s rise of 5.01%. Only eight of the 40 bank stocks have risen since January, and for 12 bank stocks, the fall has been between 25% and 45%.
The pack of new private banks has done better than the rest. Axis Bank Ltd, HDFC Bank Ltd, ICICI Bank Ltd, IndusInd Bank Ltd, Kotak Mahindra Bank Ltd and Yes Bank Ltd have all posted at least 20% or more rise in their net profits in the September quarter and, barring ICICI Bank, which has a gross NPAs of 3.54%, bad loans of all banks in this group are less than 2% of their loans. After provisions, their net NPAs, including ICICI Bank, is less than 1% each. This is something to ponder on. All banks are operating in the same economic milieu, but some are managing the stress better than others.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank. Email your comments to bankerstrust@livemint.com.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
