1Q’FY17 BANKING PERFORMANCE REVIEW

Overall, the rate of increase in bad loans for the banking industry slowed in the June quarter, but the trend is not uniform even for the private banks

The dominant theme of conversation among banking sector analysts these days is whether the worst is over for India’s state-owned banks that roughly has 70% market share. I spoke to four of them last week. While two analysts say that these banks have been to hell and back, the other two are sceptical; according to them, some more pain is left for many banks. I am not naming any one of them as we spoke on condition of anonymity.

The answer lies in the numbers—more than the quantum of bad loans that each bank has piled up, the growth in the pile over the past three quarters ever since the Reserve Bank of India (RBI) asked them to clean up their balance sheets. Between August and December 2015, the RBI inspected the loan portfolios of all banks with a fine-tooth comb and asked them to set aside money for three kinds of loans—non-performing assets (NPAs) not recognized yet by them; loans given to projects where the dates of commencement of commercial operations had passed but the projects have failed to take off; and restructured loans.

The banks were directed to provide for the first two types of loans in two phases in the December and March quarters of fiscal year 2016, at least 50% each. For the restructured loans, they were asked to make 15% provision in six quarters, 2.5% each, till March 2017.

This simply means all banks should be through with recognizing NPAs and making provision for them by March 2016 even as they will continue to provide for their restructured assets till March 2017, by when the entire clean-up exercise gets over. Has this happened?

Bank of Baroda, which claimed to have bit the bullet in the December quarter itself, made a massive provision ofRs.6,165 crore and posted a Rs.3,342 crore net loss. It did an encore in the next quarter and made an even higher provision of Rs.6,858 crore and reported a marginally narrower loss of Rs.3,230 crore. In the June quarter, its provision against bad loans dropped some 71% to Rs.2,004 crore even as its gross NPAs rose 6% to Rs.42,992 crore.

This is more than double of the pile of bad assets the bank had a year ago (Rs.17,274 crore) but the pace of growth in NPAs has definitely slowed. In percentage terms, its gross NPAs rose from 4.13% in June 2015 to 11.15% now and after provisioning, net NPAs are 5.73%.

State Bank of India (SBI) had made close to Rs.8,000 crore provisions in the December quarter and an additionalRs.13,164 crore in March. In June, it made 44% less provision as its gross NPAs rose marginally. In the past one year, SBI’s gross NPAs rose Rs.56,421 crore to Rs.1.15 trillion, but accretion of new bad loans is certainly not as much as we had seen in the past three quarters. In percentage terms, its gross NPAs rose from 4.29% of loans in June 2015 to 6.94% in June 2016 and after provisioning, the net NPAs are now 4.05%.

Among large banks, Punjab National Bank, Bank of India and Canara Bank seem to have got a hang of their bad loans even though their level of NPAs vary, but for quite a few banks, we have not seen the worst yet. For instance, take the case of Indian Overseas Bank, saddled with more than one-fifth of its loan book turning bad. Its gross NPAs had risen 17% in the December quarter and 33% in March, fromRs.22,672 crore to Rs.30,049 crore. On top of that, in the June quarter, it has risen a further 13% to Rs.34,000 crore.

There is no respite from rising bad loans for a few SBI associate banks too. State Bank of Travancore had refused to recognize growth in NPAs in the December quarter, but had shown some aggression in March when its gross NPAs rose some 23%. However, that was not enough. So, in the June quarter, the pile doubled to Rs.6,401 crore.

Data compiled by Mint Research’s Ravindra Sonavane shows that State Bank of Bikaner & Jaipur too was slow in admitting the problem. Its gross NPAs rose around 5% and 17% in the December and March quarter, respectively, but in June, it has risen by more than 27%, on a higher base. State Bank of Mysore too has shown around 19% growth in bad loans in the June quarter after a 34% growth in the December quarter and another 25% growth in the March quarter. All of them will be merged with the parent.

The tale of woe continues for a few other banks such as Oriental Bank of Commerce, Allahabad Bank, Bank of Maharasthra and Andhra Bank. In percentage terms, Uco Bank and United Bank of India have higher NPAs than these banks, but both have added less bad assets in the June quarter than the preceding quarter.

Overall, the rate of increase in bad loans for the banking industry slowed in the June quarter, but the trend is not uniform even for the private banks. Axis Bank’s gross NPAs have risen 57% in the June quarter and that of Karur Vysya Bank, little more than 37% (after a drop in two successive quarters), while ICICI Bank has managed to contain the growth at a little less than 4%.

At a recent banking seminar, RBI deputy governor S.S. Mundra had said for some banks, it looks like the worst is over but some others are still struggling and “it is still work in progress”. The banks are in the business of lending and part of the loans will always go bad for a variety of reasons, including inefficient credit appraisal and monitoring, but shoving them under the rug is not a good idea.

The continuous rise of bad loans in the June quarter for some banks and a sudden surge for a few has two explanations. One, they refused to reveal the real picture in December and March; and, two, more loans turned bad in June, something the managements had not anticipated. Even if the second premise is true, it’s not a good sign when most banks have virtually stopped giving fresh loans.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.