Home / Industry / Banking /  Government bank earnings provide some good news on bad loans

MUMBAI : Aggregate bad loans of state-run banks declined 12% to 7.17 trillion in the year ended 31 March as the rate at which loans turned bad slowed and lenders accelerated a long-running clean-up by writing off soured assets.

For private sector banks, the reduction in gross non-performing assets (NPAs) was 1.3% during the same period, according to data collated by Capitaline. The data was compiled from 18 public sector banks and 17 that were outside state control.

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Fiscal year (FY) 2018-19 marked the first year of improvement in impaired loan ratios, giving comfort that Indian banks are on a path to recovery in terms of asset quality, Kotak Institutional Equities said in a note.

“Stressed asset recognition of corporate assets is broadly complete (barring few select names) and slippages have normalized," the 3 June note said.

State Bank of India (SBI), the nation’s largest lender, reported the biggest asset quality improvement. The bank brought bad loans down 23% to 1.72 trillion as of 31 March from 2.2 trillion at the end of the previous financial year. The bank also saw a decline in its share of total NPAs in the sector to 19% in FY19 from 22% in the previous year.

SBI chairman Rajnish Kumar told analysts after announcing the fiscal-fourth quarter earnings that the bank had controlled fresh slippages, or good loans turning bad. “For all past legacy accounts, we have made more than required provisions. It is reflected in provision coverage ratio, it is reflected in net NPA ratio," he said, adding that the bank will recover 16,000 crore from three large accounts in the National Company Law Tribunal (NCLT) and has set a recovery target of 35,000-38,000 crore in FY20. The 16,000-crore recovery, Kumar said, “can happen in this quarter, it can happen in the next quarter. I’m very confident that it will happen in this calendar year".

Apart from reporting lower slippages, banks have also written off several loans from their books after setting aside an equal sum of money as provisions. Bankers call it a technical write-off where the loans are taken of the books of banks but are still subjected to recovery mechanisms. For instance, SBI wrote off 61,663 crore in the previous fiscal and Punjab National Bank wrote off 12,253 crore. These two banks wrote off 40,809 crore and 7,407 crore, respectively in FY18.

While slippages in state-run banks have been declining, this is not the case with private banks which saw an increase in the March quarter. Reliance Securities said in a report that after declining for the last three quarters, aggregate slippages increased marginally for banks to 3.2% in the March quarter from 3.1% in the preceding quarter, led by the private banks which saw an increase of 34% sequentially.

“For PSBs, slippages continued to decline, albeit at a slower pace. Higher quarterly slippages can mainly be attributed to recognition of residual IL&FS and Jet exposures as sub-standard by banks," the report said.

State-run lenders also witnessed a decline in their provisions for the full year, showed Capitaline data. Total provisions for these banks stood at 2.3 trillion in the previous fiscal, down 11% from the previous year. After accounting for private sector lenders, the total provisions for the banking industry fell 5% to 3.13 trillion. Provisions is the amount of money banks set aside as buffer for each loan they disburse, with the quantum changing with the changing quality of the underlying asset.

On the profitability front, PSBs have reported aggregate losses in FY19 whereas private banks have remained profitable. The total losses of PSBs stood at 57,835.23 crore in FY19, down from losses of 75,936.49 in FY18. Meanwhile, private banks posted a net profit of 28,610.16 crore in FY19.

However, analysts expect public sector banks to perform better in terms of profitability in FY20 while remaining cautious on slippages in non-corporate loans. The Reliance Securities report said that for PSBs, moderation in credit costs and write-backs from large NCLT recoveries are expected to aid FY20 earning, though ageing related provisions could continue for some.

“We remain cautious on PSBs (except SBI) as we expect subdued loan growth and weak spreads to limit expansion in return on assets (RoAs). Moreover, while concerns in the corporate book are largely factored, slippages from agri and SME portfolio remain elevated for many," the report said.

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