Bank balance sheets are on the mend and the proof of this is the reduction in the toxic loan pile, as well as a slower rate of bad loan accretion. The hope of healthier balance sheets has made investors friendlier towards bank stocks too, with the Nifty Bank index outperforming the Nifty 500 index by more than 10% in the past one year.

At first look, the December quarter (Q3) results had some good news. Bad loans, as a percentage of total advances on a net basis, have come down sequentially for 30 of the 39 listed banks. Provision coverage ratios have been ramped up, especially by the most-hit public sector banks. The gross bad loan stock has reduced by more than 30,000 crore from the previous quarter, but the net bad loan stock has decreased even more, by as much as 45,000 crore.

But here is exactly where the trouble begins. How have banks been able to reduce their toxic asset pile? The answer to that question is not very encouraging. A sample of 12 banks across public and private sectors, which includes most big lenders, shows that they have brought down toxic assets by writing off dud loans and not just because borrowers have begun paying back.

Banks have reported better recoveries and upgrades, besides healthier bad loan ratios, but their write-offs too have increased.
Banks have reported better recoveries and upgrades, besides healthier bad loan ratios, but their write-offs too have increased. (Naveen Kumar Saini/Mint)

A Kotak Institutional Equities research note shows that for the December quarter, 12 lenders wrote off nearly 33,000 crore worth of loans, or roughly 2.7% of their advances. To be sure, write-offs don’t mean the end of the loan contract, as lenders continue to chase these borrowers for recovery. But historically, recovery from written-off accounts are abysmally low.

Of course, it would be unfair to ignore the fact that recoveries and upgrades together totalled 3.7% of advances of these banks, higher than the write-offs. That’s an improvement of over 1.9 percentage points from a year ago.

Dig deeper, and it is evident that upgrades and recoveries have bunched up as a handful of large accounts got resolved through the Insolvency and Bankruptcy Code (IBC).

Lenders are dependent disproportionately on IBC for recoveries. But the code is far from being effective, considering that out of 1,484 cases admitted since it came into effect, only 79 have been resolved with resolution plans approved as of December. Of the 12 large cases that the regulator told banks to refer to IBC, resolution is under way in only four.

It is clear that resolution under IBC needs to be speeded up for investors to really like bank stocks. Analysts are hopeful that the pace of resolution will increase. But if cases like Essar Steel and Amtek Auto are any indication, it is wishful thinking that large resolutions will happen quickly.

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