Banks' overdue SMA-2 loans rise in Q4 even as overall asset quality improves

NPA

Overdue loans classified as SMA-2 (special mention accounts-2) increased for at least 11 banks including State Bank of India and Punjab National Bank in the January-March quarter, a Moneycontrol analysis showed. Experts said the trend indicates some concern over their asset quality.

SMA-2 loans are those that have been overdue for more than 60 days and up to 90 days.

The increase in this category of loans came even as banks reported better asset quality in the quarter. Experts said the development evokes some concern on their future asset quality, although the outlook remains healthy.

According to Moneycontrol’s analysis of 16 banks, 11 banks including State Bank of India, the country's largest, and Punjab National Bank reported an increase in SMA-2 loans.

However, this category of loans for Kotak Mahindra Bank, South Indian Bank, Bank of Baroda, Bank of India, and Indian Bank declined.

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Unsecured loans

According to Sanjay Agarwal, senior director at CARE Ratings, the rise in SMA-2 numbers for some banks can be attributed to an increase in personal loans and select industrial accounts.

An increase in SMA-2 loans of a bank usually suggests that the overall asset quality has deteriorated, while an improvement in SMA-2 loans indicates that the overall asset quality has become better and will remain robust.

“Our sense is that the growing SMA-2 loans for banks is an early indication of rising stress in loan repayments by borrowers. With most banks focusing on growing their unsecured books, the rising SMA-2 loans do not bode well for the overall asset quality,” said Shreyansh V. Shah, a research analyst at StoxBox.

State Bank of India reported an uptick in SMA-2 loans to Rs 2,062 crore in the January-March quarter from Rs 795 crore a year earlier.

Union Bank of India's SMA-2 loans rose to Rs 1,024 crore in Q4 of FY24 from Rs 553 crore in Q4 of FY23, according to an investor presentation.

Central Bank of India reported an increase in SMA-2 loans to Rs 94 crore from Rs 40 crore in the year-ago period.

However, Bank of Baroda’s combined SMA-1 and SMA-2 loans shrank to 0.25 percent of total advances as of March 31, 2024, from 0.32 percent as of March 31, 2023. Motilal Oswal Financial Services said in a report dated May 10 that a lower SMA book provides further comfort on asset quality.

Bank of India and Bank of Maharashtra also reported a fall in SMA-2 loans in the January-March quarter.

Overall asset quality

The overall asset quality of state-owned banks and private banks improved in the quarter ended March, although some banks reported an increase in their net non-performing asset ratios.

The gross non-performing asset (GNPA) ratio of State Bank of India stood at 2.24 percent in Q4 as against 2.78 percent last year, while its net NPA came in at 0.57 percent compared to 0.67 percent last year. At the post-results press conference, SBI chairman Dinesh Khara said the GNPA at 2.24 percent was the lowest in 10 years.

Kotak Mahindra Bank’s GNPA stood at 1.39 percent versus 1.78 percent last year and its NNPA was at 0.34 percent compared to 0.37 percent last year.

Bank of Maharashtra said its GNPA had already fallen below 2 percent and that level will be maintained.

"We will remain below 2 percent. NNPA between 0.2 percent to 0.25 percent, and slippage ratio anything around 0.75 percent to 1 percent,” Nidhu Saxena, managing director of Bank of Maharashtra, said on a call after earnings on April 26.

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Way ahead

Agarwal at CARE Ratings said banks are already looking to address the issue and work on managing the matter.

“However, given the faster increase in the business across these categories, slippages could occur as a part of the regular operating pattern of banks,” he added.

“Unless banks deploy prudent recovery strategies, it would be difficult to maintain good asset quality, with the only respite being the adequate provisioning done by most banks to meet the challenging environment,” Shah of StoxBox said.