Five banking trends for the new year

This could be a year of higher NPAs, more recovery, relatively stronger bank balance sheets, low credit growth and better-managed cooperative banks

No prizes for guessing the dominant trend in Indian banking in 2020: The pile of bad loans will rise. The Reserve Bank of India’s (RBI’s) latest Financial Stability Report (FSR), a biannual health check of the banking system, says banks’ gross non-performing assets (NPAs) may rise from 9.3 per cent of total loans in September 2019 to 9.9 per cent by September 2020.

The regulator has given three reasons for this: Changes in the macroeconomic scenario, marginal rise in fresh slippages and the so-called denominator effect. The third one is simple arithmetic — as the credit portfolio of the banks has not been growing, in percentage terms, the NPAs will rise. Yet another factor that will contribute to the rise is the divergence in banks’ estimate of bad assets and the regulator’s assessment. At least a dozen banks have disclosed around Rs 29,000 crore divergence so far.

Incidentally, the RBI’s June FSR had said with the bulk of the legacy NPAs already being recognised in banks’ books, the bad loan cycle seemed to have turned around. It indicated that gross NPAs might decline from 9.3 per cent in March 2019 to 9 per cent in March 2020.

That was the second successive FSR to indicate a recovery on the bad loan front. In December 2018, the RBI stress tests observed that the asset quality of the banks improved, with gross NPAs declining from 11.5 per cent in March 2018 to 10.8 per cent in September 2018. It had even predicted that the ratio might decline from 10.8 per cent to 10.3 per cent in March 2019.

The trend has reversed. The fresh slippages will include banks’ exposure to the shadow banking industry. In the past few years, many public sector banks were restrained from giving fresh loans; the shadow banks rushed to fill in the space, growing their loan portfolios at a scorching space. Those banks which were in a position to lend did give money to these shadow banks to grow their credit portfolio.

Rajnish Kumar, chairman of State Bank of India (SBI), has focused on the second trend, saying 2020 will be the best year for NPA recovery. The Rs 42,000 crore recovery from Essar Steel (Rs 38,896 crore for the lenders and Rs 3,104 crore for the operational creditors) in December after a two-year long insolvency process, fraught with court cases, is the turning point.

Around the same time, at least three more insolvency cases got resolved. The four collectively involved at least Rs 65,000 crore; the banks have recovered close to Rs 50,000 crore. The insolvency code, which came into effect in 2016, is maturing every day and banks are gearing up to recover money both on this platform and outside it, using this as a threat.

Another piece of good news is that banks have started setting aside more money to provide for the bad assets leading to rise in the so-called provision coverage ratio (PCR). The PCR of the banking industry rose sharply to 60.6 per cent in March 2019 from 52.4 per cent in September 2018 and 48.3 per cent in March 2018. There has been a marginal increase in PCR from 60.5 per cent in March 2019 to 61.5 per cent in September 2019. Higher recovery will encourage banks to increase the PCR and make their balance sheets stronger. The PCR of the weak IDBI Bank Ltd is at least 92 per cent and that of the SBI is close to 82 per cent.

The not-so-good news is the low credit offtake. The June 2019 FSR was bullish on credit growth. It had spoken about public sector banks registering near double-digit growth. The scenario has changed. The credit growth remained subdued at 8.7 per cent year-on-year in September 2019, though private sector banks registered 16.5 per cent growth. Till the first week of December, the year-on-year credit growth has been even lower at 7.9 per cent (versus 15.1 per cent in the previous year). Since April, in the current financial year, credit growth has been 1.7 per cent (6.7 per cent). Rating agency ICRA has pegged the growth for the current year at 8 per cent, a 58-year low.

Slowing economic growth and lack of demand are playing out on the credit turf. Trigger-happy investigative agencies have also been contributing to this. The bankers are scared of being grilled by such agencies, served look-out notices and even jailed. They don’t want to take credit decisions.

Finally, the cooperative banks will have to change the way they function, following a series of RBI steps in the aftermath of the collapse of a large multistate urban cooperative bank (UCB). The banking regulator wants the UCBs with at least Rs 100 crore deposits to have professionally run boards of management; it will also have a say in the selection of the CEOs, treating the UCBs on a par with commercial banks. The “fit and proper” criterion will be applicable to their directors as well and, if they don’t toe the line, they will not be able to expand their branch network.

The large UCBs with total assets of at least Rs 500 crore will have to report all credit information, including accounts showing signs of stress, for exposure of Rs 5 crore and above to the central bank’s real time data repository. The quarterly exercise has begun on December 31 . The RBI also proposes to pare the single and group borrowers limits of such banks. Currently, they need to disburse 40 per cent of their loans to the so-called priority sector. The plan is to raise the limit to 75 per cent, on the line of the small finance banks (SFBs).

The RBI has been trying to woo the cooperative banks into the fold of SFBs. The on-tap licensing norms for the SFBs are in place. Let’s see how many UCBs knock on the open window.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. His latest book is “HDFC Bank 2.0: From Dawn to Digital”. Twitter: TamalBandyo