Worsening bankability

Banks' Q2 results show bad loan problem far from over

India’s bankers are eternal optimists — the recent statements of some of their leading lights suggested that the idiom has changed from recognition to resolution of the stressed assets problem. However, the earnings season for the July-September quarter has dispelled such hopes very quickly. A look at the ratio of non-performing assets (NPAs) shows that India’s NPA levels place it among the worst-performing major economies of the world. In all, 38 banks (23 public sector and 15 private ones) have declared their results and the performance is dismal. Net profits have fallen by 26 per cent year on year (y-o-y); interest earned has increased marginally and non-interest income has risen 58 per cent.  Gross NPAs have risen a whopping 98 per cent to Rs 6.5 lakh crore compared to Rs 3.3 lakh crore in July-September 2015. But on a sequential basis, gross NPAs are up 6.7 per cent. Net NPAs, that is bad debts not covered by provisioning, have risen by 106 per cent y-o-y to Rs 3.76 lakh crore. Net NPAs are also up sequentially by five per cent and provisioning has risen sharply. Gross NPAs now amount to 8.9 per cent and net NPAs to five per cent — higher than the central bank’s earlier estimates. Other stressed assets such as restructured loans amount to another 3.5 per cent. Worse still, Credit Suisse reckons that at least Rs 3.3 lakh crore more in sticky assets are yet to be recognised. Taken together, all stressed assets would amount to over 15 per cent and this is probably the worst impairment ratio in a large emerging market.

 
Public sector banks (PSBs) are worse off — they contribute 73 per cent of advances and about 90 per cent of NPAs. Their gross NPAs amount to almost 11 per cent of their total advances and net NPAs are 6.4 per cent. Many PSBs are edging closer to bankruptcy, that is their net worth could be wiped out. In the private sector, gross NPAs amount to 3.3 per cent and net NPAs are about 1.7 per cent. However, some private sector banks, such as Axis Bank and ICICI Bank, are also writing off large NPAs. ICICI Bank increased its provisioning by 650 per cent while Axis Bank saw profitability drop 84 per cent. Differences in asset quality are being reflected in valuations. Many PSBs trade below the book value and at single-digit price-earning (PE) ratios. Private sector banks have PE ratios above 30. The recapitalisation of PSB balance sheets would require subscribing at least Rs 2 lakh crore and probably much more to conform to the Basel-III norms of capital adequacy. The government would find it hard to raise that amount of money and it is not politically acceptable to sell large stakes.

 
In the context, the recent demonetisation further complicates things. It has led to a surge in deposits and that may translate into lower lending rates and eventually higher credit volume. But it has also led to severe curtailment of commercial activity, which means lower credit demand. The net effect is likely to be higher NPAs. However, the Reserve Bank of India’s liabilities will reduce as cash with the public declines. It has been suggested that the central bank could use its reserves to pay an enhanced dividend to the government, which could then be used to boost the Tier-1 capital in banks. This would be a clever accounting trick but it would also, in effect, monetise the fiscal deficit to recapitalise the banking sector. Such jugglery apart, the banking sector is likely to remain under severe stress in the foreseeable future.