On RBI’s diktat, banks had to make provisions of 40 percent (earlier 50 percent) toward such accounts. Any recovery will boost banks’ profitability
One statistic underlines the underwhelming performance of banks in the fourth quarter of FY18.
Punjab National Bank (PNB) posted a loss of Rs 13,417 crore in the quarter ending March 31, much higher than the cumulative loss of all banks a year back at Rs 8,975 crore.
Country's biggest lender State Bank of India (SBI) wasn't far behind. It reported Rs 7,718 crore net loss.
Both SBI and PNB - country’s top two public sector lenders - reported their biggest-ever quarterly losses, accounting for a total of over Rs 3.10 lakh crore worth of gross non-performing assets (NPAs) as compared to over 7.7 lakh crore for the 28 banks. This against a total of Rs 8.8 lakh crore of all commercial banks till December end.
Overall, 28 banks have reported their financial results for the fourth quarter. Their cumulative loss is over four times the total profit.
The net loss of 13 banks - who were in red - stood at Rs 44,250 crore, towering over the profit of 15 banks, at Rs 10,869 crore.
A year ago, the net loss number of Rs 8,975 crore (led by IDBI Bank’s Rs 3,200 crore) was against a profit of Rs 16,011 crore in the quarter ending March 2017.
Their total provisions, or capital set aside during the year (most of it towards bad loans), increased by about 150 percent.
Winners & losers
Not surprisingly, private banks scored over their public sector peers.
Of the 14 public sector banks who have announced results, only two – Indian Bank and Vijaya Bank – have made profits in the January to March quarter. And in the case of 28 banks, gross NPA ratio stood at an average of 10.15 percent of total loans.
Source of the pain
Much of the pain is due to the revised NPA norms, released by the Reserve Bank of India (RBI), for faster recognition of stressed assets. Additionally, losses in their treasury portfolio, wage revision and hike in gratuity added to the cost of provisions.
Banks have also been making provisions for the accounts facing insolvency. For now, with the success of Tata Steel buying Bhushan Steel - one of the large 12 accounts pushed by RBI to the insolvency court - banks are hopeful of getting a part of their money back.
SBI Chairman Rajinish Kumar said that the loss will not exceed 50-52 percent, as against a 56 percent provision already made.
In the second list of about 28 accounts, also referred by RBI to be resolved under the Insolvency and Bankruptcy Code (IBC), the country's largest lender has made 75 percent provisions.
On RBI’s diktat, banks had to make provisions of 40 percent (earlier 50 percent) toward such accounts. Any recovery will boost banks’ profitability.
Banking stress so far
It's not all bad news though.
Of the total loans in the Indian banking system, the ratio of the troubled or stressed loans reduced to 11.9 percent as on December 2017, from 12.2 percent three months earlier.
For the 21 state-run banks, which account for more than two-thirds of India's banking assets, such loans stood at Rs 8.26 lakh crore, or 15.8 percent of their total loans as of December 31, 2017.
This means, out of every Rs 100 lent, Rs 15.8 has a high risk of not being repaid.
According to Moody’s Investors service, the overall pool of stressed assets among public sector banks stood at about 16.5 percent of total outstanding loans as of December 2017.
So far, 11 of these 21 public sector banks are already under the Reserve Bank of India's prompt corrective action (PCA) framework, with two to three more to come under the radar. Typically, PCA restricts lending activities and network expansion of banks. This will restrict growth of their core lending business as they can lend to only select high-graded borrowers, depending on their risk threshold.
For better prospects
Leaving little room for further pain, RBI’s new rules will ensure banks take immediate action to recognise bad loans and attempt resolution within 180 days of the first default.
SBI’s Kumar said: “All the stressed assets are moving to stressed assets resolution group that will leave our corporate accounts group and newly named commercial credit group (CCG) sufficient time to look for good quality asset. Wherever our expectation of risk-reward metrics is met, we will pursue all those opportunities in a big way and we are all set to come to the growth as far as the corporate credit is concerned…We will lend where the probability of default is zero.”
Further, banks including SBI are also aggressively focusing on the retail engine, which is the only segment growing for most private lenders as it ensures their risks are diversified.
Investors see Acche Din?
Despite the blood-bath in the public sector banks’ balance sheets, the bourses have given a thumbs up to the banking index, especially after SBI’s results announcement on Tuesday.
Just after the Q4 loss, shares of SBI surged to a six-week high on May 22. On Wednesday, SBI shares were higher by 3.5 percent. Bank of Baroda, whose results are due on Friday also rose by 2.5 percent. PNB also rose over 2 percent but ended in red.
In the last one month, Bankex rose as high as six percent as against a marginal drop of 0.78 percent in BSE Sensex during the same period.
“Last year was one of despair, this year is of hope and the one ending March 2020 will be one of happiness,” SBI chairman said during the press briefing after the results announcement.With expectation of recognition of all bad loans and recovery from IBC accounts, it remains to be seen if the worst is indeed over and “Acchhe Din” is here for the banking sector.