India's banking story still evolving

Banks have started seeing signs of growth in credit. Retail loans still remain the growth driver but money has also started flowing to the corporate sector

After the September quarter earnings, when the banking industry had made record profits, we saw a spring in the step of bankers. 

After the December quarter, that spring has turned into a jog. If another wave of the Covid-19 pandemic doesn’t hit us, many of them will soon start running.

Led by India’s largest lender, the State Bank of India (SBI), public sector banks (PSBs) have collectively recorded a net profit of Rs 17,729 crore in the December quarter — the highest ever. Including the earnings of listed private banks, the industry’s net profit is Rs 44,733 crore, surpassing the September quarter’s record high. SBI has recorded a quarterly net profit of Rs 8,432 crore, its highest ever; and India’s most valued HDFC Bank Ltd, has, for the first time, crossed the Rs 10,000 crore-mark in net profit for a quarter — Rs 10,342 crore. (All figures are rounded off.)

While private banks, as a group, recorded a net loss in just one quarter, PSBs have posted net losses in as many as 11 of the past 25 quarters since December 2015 when the Reserve Bank of India (RBI) told them to clean up their bad loan-laden balance sheets. In the five quarters during this period, when the entire industry had made losses, the highest was Rs 41,630 crore in March 2018.

As there is still a chill in the air, after the December 2021 quarter earnings, the bankers can relax, sip Pinot Noir, and forget the March 2018 quarter as a bad dream.

Since June 2021, all PSBs have made it a habit of making net profits even as quarter-on-quarter at least three of them have seen a drop in profits. Among private banks, South Indian Bank Ltd continues to be in the red — even though the quantum of loss has fallen to Rs 50 crore from Rs 187 crore in September.

Overall, year-on-year, PSBs’ net profits have jumped 138.5 per cent and those of private banks, 37 per cent, leading to over 64 per cent rise in the industry’s net profit.

What has brought about this rise in profits?

The main driver of a bank’s profit is its net interest income (NII) or the difference between what it earns from the borrowers and what it pays to the depositors. For PSBs, the rise in NII has been 6.7 per cent; and for private banks, 13.4 per cent. Two PSBs and three private banks have seen a drop in NII.

The growth in other income, or income from treasury, fees and recovery of written-off loans, has actually declined for the industry in the December quarter — 3.3 per cent. Private banks have seen a meagre 1.8 per cent growth in other income, while PSBs have recorded a 7.8 per cent fall. Barring a few exceptions, most PSBs and many private banks have seen an erosion in other income, primarily because of the losses in treasury income as bond yield started rising in the quarter.

Things are getting better but there are pockets of discomfort. Many banks are chasing retail assets before putting in place a proper risk management framework, while a few are mispricing risks to woo corporate assets

While the NII growth has been muted and other income declined, their operating profits give a clue to the spectacular growth in net profits. Private banks’ operating profits have grown just 2.2 per cent, while the PSBs have recorded a 0.6 per cent decline. For the industry, the operating profit growth has been 0.8 per cent (against a net profit growth of 64.4 per cent).
 

A sharp drop in provisions and contingencies has driven the growth in net profits. Private banks have shown a 42.5 per cent decline in provisions and contingencies, and the PSBs, 34.5 per cent. Overall, the decline for industry is at least 37 per cent. The Rs 61,434 crore provision in December 2020 has dropped to Rs 38,603 crore in December 2021 — the lowest for the industry since the June 2017 quarter. The highest provisions and contingencies were made in March 2018 — Rs 1.23 trillion, when the industry made a loss of Rs 41,630 crore.

Barring Dhanlaxmi Bank Ltd in the private sector and three PSBs (Central Bank, Bank of Maharashtra and Indian Bank), all banks have set aside much less money compared to what they had done a year ago as the bad loan pile is shrinking.

The provision coverage ratio, or the money set aside for bad loans, is over 80 per cent for all PSBs. For UCO Bank, Bank of Maharashtra and Indian Overseas Bank, it’s more than 90 per cent. SBI’s provision coverage ratio is 88.3 per cent, while for Bank of Baroda, Central Bank, Bank of India, Punjab & Sind Bank and Indian Bank it is around 86 per cent or more. Among private banks, IDBI Bank Ltd takes the cake with over 97 per cent coverage ratio.

Finally, how is their quality of assets? Each and every bank has been able to bring down both the gross and net non-performing assets (NPAs) quarter-on-quarter — in December from September. But for most of them, these are higher than the year-ago period, December 2020. We should overlook the year-on-year comparison of NPAs since following the Supreme Court order, banks did not classify their bad assets as NPAs last year. The interim order was to give relief to the pandemic-affected borrowers who could not service their loans.

Among private banks, IDBI Bank continues to have the maximum gross NPAs, 20.6 per cent of loans, followed by Yes Bank Ltd (14.65 per cent) and Bandhan Bank Ltd (10.8 per cent). Among PSBs, Central Bank of India has the highest gross NPAs of 15.2 per cent, followed by Punjab & Sind Bank (14.4 per cent) and Punjab National Bank (12.9 per cent). When it comes to net NPAs, Yes Bank tops the private banks’ list at 5.3 per cent, and Punjab National Bank leads at 4.9 per cent among PSBs.

How does a bank bring down its NPAs? Through recovery of bad assets, upgradation (when the borrowers pay up the arrears), stopping fresh slippages and by way of technical write-offs – a typical Indian practice whereby a bank gets rid of the gross NPAs from its balance sheets but the loans remain with the branches in a category called advances under collection accounts or AUCA. As and when the loans are recovered, the money adds to the bank’s profitability.

It seems some of the PSBs, particularly those that have become bigger through mergers in the recent past, have brought down their gross NPAs through such write-offs. The private banks, on the other hand, pared their gross NPAs by selling off the bad loans fast to asset reconstruction companies.

Banks have started seeing signs of growth in credit. They are sanctioning loans even though the disbursements of such loans may take a while. Retail loans still remain the growth driver but money has also started flowing to the corporate sector for investments in infrastructure and solar energy projects. We may see a double-digit credit growth in the current financial year. If the plie of credit grows, by simple arithmetic, in percentage terms, the NPAs will drop further (provided there is no fresh slippage).

Is the Indian banking sector out of the woods? Hang on. There are pockets of discomfort. Many banks are chasing retail assets before putting in place the right risk management framework, while a few are mispricing risks to woo corporate assets. Also, governance is a casualty in a few banks. But that’s a different story.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Story

To read his previous columns, please log on to www.bankerstrust.in

Twitter: @TamalBandyo