Are Indian banks out of the woods? Yes, no and the answers in between

Recovery of bad loans and fresh slippages or new NPAs will determine the road ahead for the banking industry

The earnings season is over. As I write this piece, most banks have announced their September-quarter results. Many have surprised observers, surpassing analysts’ profit estimates. Even if a few have announced losses or smaller profits, that’s primarily on account of one-off deferred tax asset (DTA) adjustments, following the government’s historic decision to pare corporation tax.
 
The quarter-on-quarter (Q-o-Q) net profit of 35 listed banks that had announced their earnings until last weekend was down by over 37 per cent, but their profits before tax were up 9.36 per cent. Why am I talking about Q-o-Q figures and not year-on-year (Y-o-Y)? That’s because the latter would not make much sense — too many banks were in losses in the September 2018 quarter, and overall the industry was in the red. The rise in operating profits, riding on growth in net interest income, is a happy sign. Y-o-Y growth in advances has been close to 11 per cent; deposits growth is higher, at 12.39 per cent.
 
Is the worst over?
 
Looking at the figures, one might be tempted to say that the worst is behind for the India banking industry. Of the 34 banks that have announced their earnings, eight are in the red; but a few of them, including Axis Bank Ltd, IDFC Bank Ltd and YES Bank, have announced losses because of DTA adjustments. These banks have made operating profits. Similarly, ICICI Bank and a few others would have reported higher net profits if not for this.
 
However, three government-owned banks and one owned by Life Insurance Corp continue to be in a bad shape. IDBI Bank’s net loss is Rs 3,459 crore, followed by Indian Overseas Bank’s (IOB’s) Rs 2,254 crore, Allahabad Bank (Rs 2,114 crore) and UCO Bank (Rs 892 crore). All four have posted hefty operating losses. Barring these four, Lakshmi Vilas Bank, and the three private banks mentioned earlier, all made profits in the September quarter.
 
One wonders why the government has decided to keep IOB in south and UCO Bank in east outside of its banking consolidation plan. While 10 banks are being merged to make four, these two will continue to keep their unique identities.
 
Assets headache
 
The not-so-good story resurfaces when we look into the quality of assets. There is marginal improvement on a Q-o-Q basis, but some of the banks’ books look really ugly. IDBI Bank’s gross non-performing assets (NPAs) are 29.43 per cent of its loan book (despite its loan book shrinking), while UCO Bank’s is 21.87 per cent and IOB’s 20 per cent. Barring State Bank of India, Indian Bank and Canara Bank, which have their gross bad assets in single digits, all other government-owned banks’ gross NPAs are in double digits – between 10.25 per cent (Bank of Baroda) and 19.89 per cent (Central Bank of India).
 
The private banks are better off, even as LVB’s gross NPAs have shot up to 21.25 per cent. Among the high-street banks, YES Bank has 7.39 per cent gross NPAs, ICICI Bank 6.37 per cent and Axis Bank 5.03 per cent.
 
Most banks have made hefty provisions or set aside money for their bad assets. As a result, their net NPAs as a percentage of loan book are not that bad. For instance, IDBI Bank’s net NPAs are 5.97 per cent, a fifth of its gross NPAs. IOB’s net NPAs are the has the highest in the pack (9.84 per cent), followed by United Bank of India, UCO Bank and Punjab National Bank — all above 7 per cent. More private banks have shown growth in bad assets than their public-sector peers. This means, there are fresh slippages or new bad assets are being added to the kitty. Many banks claim that such slippages had already been accounted for, and there’s no surprise. We need to wait and watch the trend.
 
How the picture will unfold also depends on how much provision the banks laden with bad loans have been making. Technically, this is called provision coverage ratio or PCR. The higher the PCR, the better a bank’s ability to absorb NPA shocks. Also, depending on the quantum of recovery of bad loans, a bank with a higher PCR is able to boost its profit. It’s simple arithmetic – when recovery is higher than provision already made, the extra amount gets added to the bottom line.
 
Among private banks, HDFC Bank has 114 per cent PCR. Axis Bank, ICICI Bank and IDFC First Bank have PCRs of 75 per cent or more. State Bank of India, Corporation Bank, UCO Bank and Bank of Maharashtra, among government-owned ones, have over 80 per cent PCR each while another half a dozen banks have at least 75 per cent.
 
Straight answers?
 
Is the worst behind for the Indian banking industry? There is no straight answer. At least 10 public-sector banks are now busy chalking out their consolidation plans to make four mega banks, even as the merger of Dena Bank and Vijaya Bank with Bank of Baroda is still a work in progress with no sign of a decision on its CEO. A month earlier, P S Jayakumar had vacated the corner room.
 
Whether consolidation is good or bad could be a hot topic for prime-time debate on television channels, but the fact remains that it does not bring down the government’s ownership in the banking industry. Besides, it is not business as usual for the entities involved in mergers till the process gets completed.
 
Two things will determine the road ahead for the banking industry: One, recovery of bad loans; and two, fresh slippages or new NPAs being created.
 
India’s insolvency law, introduced in 2016, is probably the toughest in the world, but the progress of recovery is too slow, as crony capitalists are eager to exploit its loopholes. They are moving courts to stall the recovery process as they hate losing their empires. The banks have been trying to use the insolvency law as a threat and settle cases outside it, but the progress has been slow.
 
Quite a few banks’ exposure to non-banking financial companies has turned sour. The amount is hefty and they will start hitting banks’ balance sheets from the December quarter. We would need to wait at least till the end of the financial year to have a final word on the health of Indian banks.
 
The writer, a consulting editor with Business Standard, is an author, and senior advisor to Jana Small Finance Bank Ltd. His latest book is HDFC Bank 2.0: From Dawn to Digital. He tweets as @TamalBandyo