The current fiscal year will end with more state-run banks posting profits thanks to higher recoveries, falling NPAs and fresh capital infusion. Notwithstanding the government’s latest capital infusion, rating agencies like Moody’s and ICRA anticipate that the industry as a whole will likely see net profits only in fiscal year 2019-20 (FY20).
FY18 has been the worst fiscal for India’s 21 public sector banks (now down to 19 following consolidation), with just two lenders — namely Indian Bank and Vijaya Bank — registering profits. FY18 has been the worst for two reasons in particular. One, the Reserve Bank of India’s February 12, 2018 circular tightened NPA recognition and provisioning norms and two, the $2 billion fraud at Punjab National Bank (PNB). Consequently, Rs 5 lakh crore worth loans deteriorated into NPAs in FY18, taking total slippages in the past three years to Rs 13.6 lakh crore, according to Crisil.
While Indian Bank posted the highest profit among PSBs at Rs 1,258.99 crore in FY18, Vijaya Bank’s profit stood at Rs 727.02 crore. The remaining 19 banks unloaded aggregate net losses of Rs 85,000 crore in FY18, while gross NPAs shot up to Rs 10.3 lakh crore, or 11.2 per cent of advances. Worse, the country’s largest lender State Bank of India (SBI) too saw a net loss of Rs 6,547.45 crore against a net profit of Rs 10,484.1 crore in 2016-17. All 21 banks had together posted a net profit of Rs 473.72 crore in the 2016-17 fiscal.
But the good news is, gross and net NPAs have been steadily declining for the past three quarters raising hopes that more PSBs will be back in the black. Gross NPAs, after peaking to Rs 10.2 lakh crore in March 2018, started declining reaching Rs 9.9 lakh crore in the September, 2018 quarter and subsequently to Rs 9.3 lakh crore in the quarter ended December, 2018.
Bad loan levels are expected to fall further to about 10 per cent of total advances by March, 2019. The reduction is due to two reasons: improved provisioning and write-offs, and increasing recoveries. Consequently, the bad loans ratio has been heading south. As a percentage of total advances, gross NPAs stood at 10.4 per cent as on December, 2018, a sharp reduction of 60 basis points (bps) over the previous quarter’s 11 per cent and the corresponding period’s 10.5 per cent. Likewise, net NPAs plunged to 4.8 per cent of total advances against the previous quarter’s 5.4 per cent. A year before, it stood at 5.8 per cent.
Interestingly, the reduction of bad loans has been sharper among public sector banks than their private peers. For instance, gross NPAs of PSBs reduced from Rs 8.6 lakh crore as on March 2018 to Rs 8 lakh crore in December 2018, while private lenders’ bad loans marginally reduced to Rs 1.28 lakh crore from Rs 1.29 lakh crore during the same period. Consequently, the industry’s net NPAs saw a reduction of about Rs 1 lakh crore during the first nine months of FY19.
Approximately Rs 4 lakh crore worth debt across 40 large borrowers is currently under resolution and more accounts are expected to be resolved under IBC, further improving the chances of loan recoveries and upgradations.
PSBs balance sheets have also been strengthened through the infusion of Rs 3.19 lakh crore, thanks to the efforts of the government and banks raising from capital markets. This has helped over eight banks to exit RBI’s stringent Prompt Corrective Action (PCA) framework, while the provision coverage ratio has improved from 46 per cent in FY15 to 69 per cent by December 2018 leading to reduced risk. Interestingly, fresh slippages reduced by Rs 58,000 crore during the first nine months of FY19 compared to the same period of the previous year.
Lastly, fresh slippages are limited now that banks have recognized most of their legacy problem loans, while recoveries from stressed assets will likely improve their overall asset quality. While provisioning coverage too is improving, thanks to the government’s additional capital infusion besides banks’ improving income, it will be insufficient to absorb losses should stressed assets spike unexpectedly from other areas, say MSMEs.