India's top six public sector banks (PSBs) in terms of asset size put up a mixed show on the loan recoveries and upgrades front in the June 2016 quarter (Q1). Recoveries of bad and doubtful debts and upgrades from bad/doubtful loans to standard loans reflect an improvement/uptick in asset quality of banks. But, unless there is a sustained improvement in this metric, it may not heal the huge asset quality pain of banks. Most banks have stepped up their focus on ramping up loan recoveries and are fighting the asset quality menace on a war footing. The numbers though indicate that few banks have managed to deliver positive results on this front, so far.
Union Bank of India (Union Bank), Punjab National Bank (PNB) and State Bank of India (SBI), for instance, reported a sequential improvement in loan recoveries in the June quarter. In fact, this is the second quarter in a row when these banks have seen sequential improvement in recoveries. A sequential movement in recoveries is a better gauge to understand the trend in a quarter as against a yearly picture. Most market experts look at at the sequential movement in key asset quality indicators such as slippages (increase in bad loans), loan recoveries and loan upgradations.
In Q1, Union Bank raced ahead of peers with a strong 72% surge in recoveries as compared to the March 2016 quarter (Q4'FY16), while PNB and SBI saw an uptick of 13% and 1%, respectively in this metric. SBI and Bank of India also witnessed healthy sequential increase in loan upgrades in the quarter even as other banks witnessed a 15 to 26% fall in the same. Canara Bank, though, posted a small two% sequential decline in upgrades in the quarter. A loan upgrade from bad/doubtful status to standard asset is positive and indicates an improvement in the clients' ability to service the loan.
Interestingly, all these six banks saw recoveries from written-off accounts decline anywhere between 36% and 63%. While an uptick in the same would have further aided asset quality, it also means that the improvement in recoveries for SBI, PNB and Union is coming from improving health of existing borrowers and is probably more sustainable than a one-time receipt from the written-off accounts.
Does it mean that the asset quality woes for these three banks are over? Not quite. This is because the actual amount of slippages exceeded the combined recoveries and upgrades for all these banks, save Bank of Baroda (BoB). BoB was the only bank where the slippages came in a shade below recoveries and upgrades in Q1. For a sustained and meaningful improvement, this trend needs to continue.
Suresh Ganapathy, Financials analyst at Macquarie Securities, says, “Unless the banks’ recover more than the fresh slippages they add in any quarter, there will not be much improvement in their asset quality.”
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Positively, most managements are aiming to achieve this with some like PNB expecting recoveries to be at par or slightly ahead of slippages over the next two-three quarters. SBI management, too, expects asset quality trends to improve going forward. Same holds true for Bank of India (BoI) as well.
“The BoI management expects recoveries and upgrades to exceed or match slippages in the remaining quarters of FY17 and is targeting recoveries and upgrades to the tune of Rs 17,500 crore for FY17,” says Shashin Upadhyay, analyst at ICICI Securities. If achieved, this will be a meaningful surge over the bank’s FY16 recoveries and upgrades worth Rs 8,547 crore.
For Q1 though recoveries were down 25% sequentially for Bank of Baroda, 20% for Bank of India and 68% for Canara Bank. On a year-on-year basis however, the recoveries have improved for all these banks and reflects the stepped up focus of managements on this front. Overall, while the asset quality stress for PSBs remains elevated, the focus on recoveries and slippages could provide some silver lining going forward.
Union Bank, PNB and SBI lead peers on loan recoveries | |||
% change quarter-on-quarter | |||
Bank | Loan | Recoveries in | Loan |
recoveries | written-off accounts | upgrades | |
Union Bank of India | 71.6 | -35.7 | -26.2 |
Punjab National Bank | 13.2 | -45.2 | -14.5 |
State Bank of India | 1.2 | -58.2 | 1,105.2 |
Bank of India | -20.1 | -63.2 | 20.8 |
Bank of Baroda | -24.6 | -62.5 | -20.7 |
Canara Bank | -67.8 | -47.9 | -2.3 |
Source: banks | |||
The above data is sorted on the basis of improvement in loan recoveries |