With the economy still in the doldrums, it hasn’t been smooth sailing for public sector banks in the March quarter. The performance yardstick investors have been interested is asset quality and there have been a few surprises in the numbers here.

The 21 state-owned banks which have declared earnings so far have combined gross non-performing assets (NPAs) of 1.38 trillion at the end of March compared with 1.33 trillion a quarter ago. To put it differently, they have added 4,183 crore to their gross NPAs in the March quarter. That is less than half of what they had added in the three months ended December and almost one-fourth the additions to bad loans in the first two quarters of the last financial year. Eight of these banks actually posted a reduction in bad loans compared with the December quarter.

That, however, doesn’t present the full picture since sale of loans to asset restructuring companies (ARCs), recoveries from some large or mid-corporate accounts and restructuring could well have led to the slowdown in bad loan accumulation. Canara Bank, for instance, sold 1,400 crore worth assets to ARCs and Bank of Baroda 671 crore.

The restructured assets of banks still remain elevated. If anything, the increase in assets recast in the March quarter is higher than the addition in gross NPAs. For 13 of the larger state-owned banks for whom data is available, restructured assets stood at 1.87 trillion at the end of March, compared with 1.73 trillion a quarter ago. Only IDBI Bank Ltd showed a reduction in outstanding recast loans.

More importantly, slippages, or fresh additions to bad loans, present a more troubling picture. For 15 state-owned banks, whose data has been compiled by Emkay Global Financial Services Ltd, slippages amounted to 23,922 crore in the March quarter, up 32% from the three months ended December. It is also 37% more than the 17,445 crore slippages in the March 2013 quarter. In this yardstick, only three banks—Bank of Baroda, Andhra Bank and United Bank of India—show a sequential reduction.

The increase in slippages is not that surprising given that demand is depressed and projects are stuck. There is also no sign of a rebound in the investment cycle anytime soon. The upshot is that optimistic guidance on asset quality from state-owned bank managements, except those with a proven track record, should be viewed with caution. So should the 25% increase in the PSU Bank Index since the beginning of this year, which is double the increase in the CNX Nifty index on the National Stock Exchange.

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