Pace of decline in banks’ asset quality slows in December quarter

Mumbai: The pace of deterioration in asset quality of Indian banks slowed in the December quarter after four straight quarters of sharp increases in bad loans, although analysts say banks’ asset quality may worsen before it gets better.

Thirty-nine of the 41 listed banks have reported earnings for the December quarter, posting a 59% rise in aggregate gross non-performing assets (NPAs) to Rs6.81 trillion from a year earlier, according to data compiled by Mint. The latest quarterly numbers are still 4.12% higher than those reported in the preceding September quarter.

While the slowing pace of asset quality deterioration may have come as a respite for Indian banks, their troubles are far from over. The Reserve Bank of India’s March deadline for banks is about a month away, and any unrecognized bad loans are likely to crimp banks’ lending ability further. With high provisions to cover bad loans and limited capital, weaker banks have slowed or stopped making new loans.

“It will not be surprising if reported NPAs go further up in the coming quarter,” said Karthik Srinivasan, senior vice-president at rating agency Icra. “Resolution is taking time because of large NPAs which are causing the bulk of the problems.”

While the scale of the bad-loan problem is much bigger for state-run banks, gross NPAs at public sector banks grew at a slower pace in the December quarter than those lenders that are outside government control. Public sector banks’ gross NPAs rose 2.76% to Rs5.95 trillion in the December quarter from the preceding three months. In comparison, bad loans at private sector lenders gained 14.5% to Rs85,904.94 crore at the end of December.

“Growth in incremental slippages has come down substantially but overall asset quality has not changed between September and December quarters. Currently, the major problem is in large accounts; in the first or second quarter of the coming financial year, we may see resolution on that,” said an analyst from Reliance Securities.

“Whenever resolution comes, slippages will be very high in that quarter as banks need to take a deep haircut. Results for the banks in the coming fourth quarter will be much lower than the last quarters. The major change for banks in the last two quarters was treasury profits,” the analyst said, requesting anonymity.

The central bank’s asset quality review in September 2015 forced banks to report previously unrecognized stressed assets as bad loans. The deadline for the clean-up has been set at March this year.

Twenty-eight of the 39 banks that have reported earnings have also seen gross NPAs rise from the preceding September quarter, according to the data compiled by Mint.

Indian Overseas Bank’s asset quality was the worst among Indian banks in the December quarter. It reported a gross NPA ratio of 22.42%, compared with 21.77% in the September quarter. Other public sector banks that saw a jump in gross NPAs include UCO Bank, where gross NPAs rose to 17.18% in the December quarter from 16.51% at the end of the September quarter. At United Bank of India, the gross NPA ratio improved to 15.98% from 16.26%.

Among private sector banks, Jammu and Kashmir Bank had the highest gross NPA ratio at 11.84% in the third quarter, against 11.33% a quarter ago.

“Gross NPA numbers will go up in the coming quarter partly driven by the last bit of clean-up exercise due to the FY17 deadline approaching. There is room for rate cuts if a large part of deposits are retained. If large lenders reduce rates, others will follow,” said Saswata Guha, director, Fitch Ratings.

After demonetization, many banks saw a surge in their deposit base, followed by a drop in the marginal cost of lending rate (MCLR). State Bank of India cut its MCLR by 90 basis points in January, the steepest in several years. A basis point is one-hundredth of a percentage point.

sahib.s@livemint.com