Banks may continue to report bad loans issues for two more quarters | Mint
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Business News/ Industry / Banking/  Banks may continue to report bad loans issues for two more quarters

Banks may continue to report bad loans issues for two more quarters

8 of 15 bankers, market analysts Mint surveyed expect further decline in asset quality for at least two morequarters

The financial fallout of the RBI directive for an asset quality review has exposed the extent of the rot in the Indian banking system. Photo: Aniruddha Chowdhury/MiontPremium
The financial fallout of the RBI directive for an asset quality review has exposed the extent of the rot in the Indian banking system. Photo: Aniruddha Chowdhury/Miont

Publicly traded banks in India have just endured the worst six months since March 2001.

They reported the fastest accretion of bad loans, mounting provisions and loss of capital in the two straight quarters ended 31 March as the country’s central bank forced the lenders to adequately disclose soured loans and set aside more money to cover them. As a result, aggregate profit of 38 listed banks that have reported their earnings so far fell by 66% for the year ended 31 March.

Reserve Bank of India governor Raghuram Rajan is trying to clean up the balance sheets of banks and has set them a March 2017 deadline. The clean-up and subsequent infusion of equity into the state-run banks, Rajan hopes, will remove the hurdles that are holding back credit growth and spur investments required for the economy to grow at a faster pace.

Through an asset quality review, RBI provided a list of companies to the lenders and directed them to treat their exposure to these companies, stressed for multiple quarters now, as a non-performing asset (NPA) and set aside cash for the same proactively. Lenders were allowed to recognize and provide for such loans over the third and fourth quarter of the fiscal year.

The financial fallout of the RBI directive has exposed the extent of the rot in the Indian banking system.

Gross non-performing assets of the 38 out of 39 listed banks stood at an unprecedented 5.7 trillion as of 31 March, as lenders added a trillion rupees worth of bad loans in each of the quarters ended December 2015 and March 2016, according to data compiled by Capitaline. Dhanlaxmi Bank, the only listed bank that has not reported its earnings, is scheduled to announce its results on Monday.

Bad loans in the Indian banking sector surged 60% between October and March and aggregate loan disbursal in the period expanded by just 4%.

The clean-up drive has resulted in deep losses for 13 out of the 38 lenders. State-controlled banks fared the worst, reporting an aggregate loss of 15,064 crore for fiscal 2016. The private sector banks reported a slower 6.46% profit growth.

Indeed, much of the pain was felt in the fiscal fourth quarter, when the public sector lenders reported an aggregate loss of 23,493 crore and their private sector counterparts reported an aggregate profit of 8,807.48 crore—a 14% decline from the year earlier.

“We don’t think the extent of losses that have been shown in FY16 will repeat. But essentially, the aggregate bottomline growth will be marginal," said Srikanth Vadlamani, vice-president and senior credit officer (financial institutions group) at Moody’s Investor Services.

While the massive clean-up drive may be over, the troubles for banks are unlikely to end any time soon, a survey of 15 bankers and market analysts by Mint revealed.

Of the 15 respondents to the survey, eight expect further deterioration in asset quality for at least two more quarters. “Fresh slippages have surely peaked. But restructured accounts may continue to fall.

Moreover, projects under implementation, which have weak cash generation and are currently under moratorium, may also slip," said Vibha Batra, group head (financial sector ratings) at ICRA Ltd. Batra added that since agriculture loan repayments follow the crop-cycle instead of quarters, NPAs from this portfolio are still understated.

Uday Kotak, executive vice-chairman of Kotak Mahindra Bank Ltd, believes the pain will continue. “The RBI’s AQR (asset quality review) is a subset of the stress in the system. AQR was not the end," Kotak said on 11 May. Kotak Mahindra Bank is among the few lenders that have escaped the impact of the central bank’s clean-up drive owing to marginal exposure to leveraged companies.

The country’s largest lender, State Bank of India (SBI), too is cautious on asset quality.

Chairman Arundhati Bhattacharya said the lender has identified 31,352 crore worth of risky loans and kept them on a “special watch".

The bank, following a conservative approach, expects 70% of these loans to slip into the bad loan category. The banking behemoth’s net profit for the quarter ended 31 March 2016 dropped 66% to 1,263.81 crore as its pile of bad loans swelled to 98,173 crore. Private sector lender Axis Bank Ltd, which also saw bad loans surge, too has a watch list of loans that it will monitor going forward.

Meanwhile, some bankers have cautioned that the surge in bad loans will impact their ability to lend. In fact, some lenders have halted further loans to beleaguered sectors.

“We have been bitten very largely by the steel sector. So, we have decided to keep away from those sectors where we have been bitten until that sector turns around. Apart from steel, we have heavy exposure to textiles and chemicals as well… We will be cautious on these sectors too," said Usha Ananthasubramanian, managing director at Punjab National Bank, earlier this month. Punjab National Bank reported a loss of 5,367 crore, the biggest quarterly loss since March 2001.

Bank of India has said that it will focus on expanding its retail portfolio and monitor the corporate loan book closely.

Even as several lenders indicated a conscious decision to prune lending, many would be stymied by their eroded capital base, analysts said. Provisioning for loans is expected to stay elevated and may continue to erode profits and thereby limit the ability to lend further.

However, respondents said the accretion to NPAs will not be as staggering as the past two quarters. “In terms of incremental slippages of banks, I think we have seen the worst of it. There will still be slippages but it would be substantially lower than FY16," said Vadlamani.

SBI’s Bhattacharya said that the bank is seeing a pick-up in credit demand and expects its loan growth to be 13-14% for fiscal 2017 as against 9% for fiscal 2016.

“The pipeline of our project financing is better than what it was 12 months back. Yes, we are beginning to see projects, we are beginning to get them, but they are not coming in large volume," she added.

A pick-up in loan growth and a quick resolution of stressed assets are critical for the troubled banks to return to profitability. While profits may still elude some banks, losses are unlikely to widen further.

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Published: 30 May 2016, 12:57 AM IST
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