The results of the quarter ended June 2022 show that both private banks (PVBs) and public sector banks (PSBs) have been able to address the issue of non-performing assets (NPAs). As evident from their results, most of these entities, especially PSBs, have been able to bring down their NPAs considerably.
“With PSBs now focusing on recoveries through the Insolvency and Bankruptcy Code (IBC), one-time settlement (OTS), sale to asset reconstruction companies (ARCs) and other strategies, recoveries are happening. Further, within the overall reduction in GNPA percentage, write-offs also tend to play a role, which for PSBs tend to be higher than at private banks,” said Karan Gupta, Director, India Ratings and Research.
What’s the NPA situation in the banking sector?
Historically, PSBs have had higher NPA levels compared to PVBs. So, when NPAs are coming down on a systemic basis, it is natural to expect that the NPA level at PSBs will come down to a greater extent than PVBs in numerical terms, as per analysts. As of March 2018, GNPA of the overall banking system was around 11.2 per cent, while for PSBs it was around 15 percent and for PVBs, around 5 percent.
Are private banks faring better than PSBs?
According to a recent research report by Bank of Baroda, most PVBs have GNPAs in the range of 0-5 percent, while for PSBs, the range is 5-10 percent, and above. But the improvement in GNPA ratio is better in PSBs compared to PVBs.
The GNPA ratio has declined to 5.7 percent in the June quarter of 2022 from 7.5 percent in the same period of 2021. PSBs (including IDBI) registered a larger decline of 221 bps to 7.2 percent in June 2022 compared to PVBs which witnessed a reduction of 110 bps to 3.1 percent in June 2022, show data from the Economic Review released by the Finance Ministry.
According to analysts, PSBs always had a higher share of loans. So, with more loans being repaid faster in the last quarter, the fall in GNPA too, has been greater at PSBs.
“Private banks have lower GNPAs, they have a higher share of performing assets, and thus their interest income is higher from these performing/standard loans. Also, as GNPAs are lower, the requirement for provisions tends to be lower, which together leads to higher profitability,” said Gupta.
Which segment was more painful for banks?
While the overall banking sector witnessed significant rise in net profit in the last quarter, factors like investment book loss and new incremental slippages to NPAs led to low net profits in PSBs. Since interest rates have gone up, the investment books have suffered mark-to-market losses at many banks, point out analysts.
According to analysts, there has been a considerable fall in new incremental slippages to NPAs. With the economy getting back on its feet, the number of new slippages to NPAs has been far less in the last quarter as compared to the number in the last two years. In the last two years, slippages to NPAs spiked after the outbreak of COVID-19, leading to a spike in NPAs during that time.
What do analysts say?
The trend of better recovery in NPAs in PSBs was witnessed even before the COVID-19 outbreak, say the analysts. As of March 2018, NPAs of the overall banking system stood at around 11.2 per cent, while it was around 15-16 per cent for PSBs, and for the private sector banks, around 6-7 per cent.
Credit growth has also picked up at PSBs, as it has for the banking system in recent quarters leading to the fall in NPAs. However, in FY22, the first quarter was subdued due to the second wave of the pandemic. Thus, in Q1 FY23, credit growth has benefited from the base effect of the corresponding quarter of last fiscal.
“Rising credit growth also contributed to GNPA percentages reducing due to the denominator effect. That said, incremental slippages to fresh NPAs is also comparatively lower this fiscal in the corporate loan book, which is the most significant portion of the overall portfolio for PSBs and more than that for most PVBs,” said Sitaraman.
Will there be a stricter disbursal policy?Analysts say that to keep a check on NPAs in the coming quarters, it is likely the banks, especially PSBs, may further tighten their underwriting processes as compared to the past.