Solvency position of PSBs worsens

If banks were to provide for all these bad loans, it would wipe off 63% of their net worth

A Business Standard analysis of 23 public sector banks shows that at the aggregate level, the solvency ratio (which is the ratio of the banks’ net non-performing assets, or NPAs, to net worth) has risen to 63.1 per cent at the end of Q3FY17, up from 60.9 per cent at the end of Q4FY16. 

This means, if banks were to provide for all these bad loans, it would wipe off 63 per cent of their net worth. At the end of Q2FY16, the ratio was 32.9 per cent. 

Experts contend the situation might deteriorate in the ongoing quarter. 

“March 31, 2017, is the deadline set by the Reserve Bank of India. So, the true extent of the bad loans in the system will probably be known by the end of the ongoing quarter,” says Vibha Batra, chief executive officer, Fairconnect Business Advisors. “There is still a gap between stressed assets and gross NPAs. As there may be slippages from these stressed assets, it is possible the actual solvency position may well be worse,” she adds. 

The Q3 results reveal the solvency ratio of three banks, namely Indian Overseas Bank, Bank of Maharashtra and United Bank of India, was more than 100 per cent. This implies their net worth is insufficient to provide for all their bad loans. 

United Bank of India though has seen a decline in the solvency ratio to 103.2 per cent at the end of Q3, from 111.3 per cent in the previous quarter. This decline reflects a drop in their net NPAs, from Rs 7,185 crore in Q2 to Rs 6,729 crores in Q3. 

On the other hand, IDBI Bank has seen a sharp deterioration in its position in the just-concluded quarter, with its solvency ratio rising from 64.9 per cent in Q2FY17 to 81.3 per cent in Q3FY17. Its net NPAs have risen from Rs 18,195 crore to Rs 20,949 crore over the same period. After IDBI, Bank of Maharashtra has seen the largest deterioration in its position, with its solvency position worsening from 120.7 per cent at the end of Q2 to 131.8 per cent at the end of the third. 

And while State Bank of India has seen only a minor slippage, its associates, namely State Bank of Bikaner and Jaipur, and State Bank of Travancore, have seen their position worsened. Union Bank of India and Oriental Bank of Commerce have also seen similar slippages. 

The only silver lining is that the true extent of the bad loans plaguing the system is now being revealed. This is shown by the decline in the gap between stressed assets and NPAs. 

“The gap between stressed assets and gross NPAs is coming down. So, the recognition is happening. It could come down further in Q4,” says Karthik Srinivasan, group head, financial sector ratings at Icra, adding, “while the quantum of stressed assets is going up, the pace of increase has slowed down.” 

Some banks have also seen an improvement, albeit small, in their position. For instance, Punjab National Bank has seen an improvement in its solvency ratio, though it continues to be precarious. The bank’s solvency ratio has fallen from 84.6 per cent in Q2FY17 to 82.5 per cent in Q3FY17. Bank of India, too, has seen an improvement, with its ratio declining from 84.7 per cent at the end of Q2 to 78.5 per cent at the end of Q3FY17. Similar improvements are seen in Jammu & Kashmir Bank as well as Vijaya Bank.

Capital concerns continue to dominate. In the current environment as some public banks are likely to find it difficult to raise money directly from markets, they will have no option but to rely on a cash-strapped central government for funding. But money from the government is unlikely to be sufficient. In its recent Budget, the government has allocated a mere Rs 10,000 crore for bank capital infusion in 2017-18, which analysts say, is way short of what is required.