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According to broking houses and analysts, loan restructuring during the period was at a historic high, as the Reserve Bank of India (RBI) had announced that lenders would have to make higher provisioning, in line with bad loans, for debt recast. Till March 31, banks were allowed to provide no more than five per cent for standard restructured advances. This has increased to 15 per cent from April.
“Overall, we expect private banks to continue to report better asset quality than their public sector counterparts, though incremental deterioration in public sector banks (PSBs) is expected to recede. However, the restructuring volume will be at a historical high due to closing of the restructuring window,” said Reliance Securities in a report.
Data from the corporate debt restructuring cell will not reveal the true picture, as the number of cases referred came down sharply in 2014-15 to 33, as compared to 101 in the previous year and 129 the year before. This is because banks are increasingly opting for the Joint Lenders’ Forum network, a framework that came into force last year, after the regulator issued guidelines.
PSBs have been reeling under high stressed assets, as they share a disproportionate burden of both non-performing assets and restructured loans.
The trend of higher provisioning burden is expected to continue in the fourth quarter as well.
“Asset quality stress is expected to continue in Q4, as the investment cycle is yet to pick up. Slippages are expected to remain on the higher side, driven by the restructured book,” said broking firm KR Choksey in a report to its clients.
Business growth
Though the third and fourth quarters are seen as ‘busy season’, since loan demand tends to be relatively higher, credit growth during January-March remained muted, amid a slowing economy. This will impact the net interest income (NII) for banks, already under pressure due to slippages. As more and more loans slip to the non-performing category, banks stop earning interest on this.
As on April 2, loans had grown 12.63 per cent year-on-year. During the same period of 2013-14, loan growth was 14 per cent. Deposit growth also lost pace, up 12.8 per cent as compared to 14.1 per cent earlier.
Analysts expect average NII growth of 10 per cent, as banks refused to cut their lending rates to spur loan demand, despite RBI cutting its lending rate twice between January and March, by a total of 50 basis points (bps).
Margins
Not responding to the central bank’s repo rate cut might help banks see some improvement in margins, as they have not reduced their base rate — the benchmark rate to which all loan rates are linked. Even so, banks started trimming their deposit rates since November.
“Led by a 12 bps decline in interest rate during the quarter, as well as a 50 bps cut in repo rate by RBI and the lack of transmission of the same in base rate by the banks, we expect the NIMs (net interest margins) for banks to be marginally higher on a quarter-on-quarter basis,” said Karvy Stock Broking.
In April, State Bank of India, ICICI Bank, HDFC Bank, Axis Bank and some other private banks have reduced their base rate. However, PSBs other than SBI have not.
Treasury gains
Fee income is expected to remain weak on account of lower commission. However, recovery, income from exchange and treasury gains will help the non-interest income to grow. Core fee income will also be weak, due to muted loan growth.
Yields on the 10-year benchmark government bond fell to 7.65 per cent in mid-January, from 7.87 per cent at end-December, on the expectation that the rate easing cycle would start sooner than later. Banks booked profit on the bond portfolio as yields softened. However, due to profit booking, yields corrected to close the quarter at 7.73 per cent.
“We expect growth in non-interest income to remain strong, although most of the other line items like fee income, income from exchange and recovery is to remain weak and similar to the previous quarter levels. The key reason for non-interest income growth will be the treasury income,” the Karvy report said.
