Banks have seen a mixed trend in their special mention account (SMA) category 2 loans in Q2FY24. SMA 2 loans are loans whose payments are overdue for 61 to 90 days.
Data suggests that in the July-September 2023 quarter, almost all major banks showed a rise in their SMA category 2 loans.
They include Indian Bank, Canara Bank, Bank of India, and Union Bank of India.
Once an account remains irregular for 90 days, it is classified as a non- performing asset (NPA) or bad loan. Banks have to set aside money, called provisions, to cover such loans. This impacts profitability.
“The mixed trends in SMA 2 loan movements among banks during the July-September quarter suggest varied credit management successes and challenges within the banking sector,” said Nitin Purswani, CEO at Medius AI.
Purswani added that a fall in SMA 2 loans for some banks could indicate effective recovery strategies and a potentially healthier credit environment, while a rise for others may signal growing stress in loan repayments, which could affect asset quality.
Also read: Jaiprakash Associates defaults on Rs 4,258 crore loans
What do numbers say?
In the July-September quarter, the country’s largest state-owned lender, State Bank of India (SBI), reported a fall in SMA category loans to Rs 1,784 crore, as on September 30, 2023, compared to Rs 1,921 crore in the year-ago period.
Similarly, Bank of Baroda reported an SMA 1 and SMA 2 loan ratio of 0.22 percent in the quarter, compared to 0.42 percent in the corresponding quarter a year ago.
All these accounts have an exposure of Rs 5 crore and above.
Bank of India, Union Bank of India, Canara Bank, Indian Bank, and Central Bank of India reported a rise in their SMA 2 loans.
Bank of India has witnessed a rise in SMA 2 loans to 0.24 percent in the July-September quarter, against 0.22 percent in the year-ago period.
Indian Bank’s SMA 2 loans rose to Rs 1,169 crore, as on September 30, compared to Rs 902 crore a year ago.
Asset quality
The asset quality of SCBs improved during H1 of 2023-24, with the overall non-performing assets (NPA) ratio declining to 3.7 percent in June 2023 from 5.7 percent a year ago, the Reserve Bank of India (RBI) said in its October bulletin.
Asset quality improved across all major sectors over the same period.
Further, ratings agency ICRA said that banks in India are expected to show further improvement in their asset quality in financial year 2023-24 due to low net slippages and write-offs.
“We are expecting banks' gross non-performing assets (GNPAs) and net NPA to improve, to around 2.8-3 percent and 0.8-0.9 percent, respectively,” ICRA said in a webinar on September 14.
The agency said that headline metrics of the banking sector would improve on an improving trajectory on the back of controlled net additions (net of recoveries and upgrades) to non-performing advances (NPAs) and reasonably strong credit growth.
Outlook
Banking analysts said that the divergence in SMA 2 loans will increase the scrutiny by the regulator and may ask them to take necessary actions.
Purswani also reiterated the same thing by saying this divergence will likely lead to increased scrutiny by regulators and investors.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
