On Tuesday, Punjab National Bank (PNB), India’s second-largest state-owned lender, posted its financial results for the first quarter of 2018-19. It reported a net loss of 940 crore, which was lower than the previous quarter’s 13,417 crore—its worst-ever loss brought on by the Nirav Modi fraud. In the June quarter, PNB announced a recovery of bad loans of 8,445 crore, aided by the 3,200 crore inflow from through the resolution of Bhushan Steel Ltd and Electrosteel Steels Ltd accounts. Are things looking up for PNB in general and the Indian banking sector in particular?

Not quite, according to the banking regulator. In June 2018, the Reserve Bank of India (RBI) cautioned in its Financial Stability Report that things would worsen before they become better. In March 2018, gross non-performing advances (NPAs) of all scheduled commercial banks stood at 11.6% of gross advances. The RBI outlined what it expected to happen to them a year hence in three scenarios. At best, it projected gross NPAs of 12.2% (baseline scenario); at worst, 13.3% (severe stress scenario).

The brunt of these bad loans are borne by India’s public sector banks. In the June quarter, for example, PNB reported gross NPAs of 18.3%, marginally lower than the 18.4% it posted in the March quarter. State Bank of India, India’s largest lender, had a gross NPA ratio of 10.9% last quarter. As of March 2018, the gross NPA ratio of all public sector banks stood at 15.6%. For March 2019, RBI has projected this to be between 16.3% (baseline scenario) and 17.3% (severe stress scenario).

In its latest results, Punjab National Bank has disclosed that it has made a provision of 1,863 crore in the June quarter, making the total provisions for the PNB fraud more than that required by RBI. When bad loans increase at a bank, it needs more capital to bankroll those bad loans and to keep lending.

Because of mounting NPAs, RBI does not expect the capital adequacy ratio of banks—how much capital a bank has for every 100 of loans—to improve over the next year. In March, the capital adequacy ratio of all scheduled commercial banks stood at 13.5%, and the RBI sees a possibility of this shrinking to 11.5% by March 2019.

In fact, in the baseline scenario itself, the RBI expects six public sector banks to see their capital adequacy ratio (CAR) fall below the minimum regulatory requirement of 9% by March 2019. Unless they can raise capital themselves, or if the government intervenes and gives them more capital support. As the purge continues, times will remain tough for Indian banks for a few more months at least.

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