Dec quarter shows much-needed improvement in asset quality for PSU banks

Slippages ratio for FY20 pegged at 3.5 per cent a tad lower than previous year's 3.7 per cent, but MSMEs, agri and retail are segments that could see fresh stress

When State Bank of India (SBI) posted 2.7 per cent net non-performing asset (NPA) ratio in December quarter (Q3), a level last seen prior to FY16, it made many think if the demons of asset quality is well-past public sector banks (PSBs). One after another when more PSBs published their financials, it became more convincing that the asset quality stress is perhaps receding for the sector.

An analysis on 12 PSBs results for Q3 show that a majority of them have seen an improvement in asset quality, both sequentially and year-on-year, as well as profit before tax, even as the credit growth remains muted.

“Corporate loan NPA was 18 – 19 per cent in FY18 and now they are trending down to 15 – 16 per cent. These numbers are likely to further come down and I see a clear trend of asset quality easing in corporate loan,” says Krishnan Sitaraman, senior director – Financial Sector Ratings and Structured Finance Ratings at CRISIL.

Experts say, two factors are helping these banks – an overall reduction in systemic stress mainly the lumpy accounts and the high provisioning costs that these banks have taken over the past years, which has brought them to a comfortable level in terms of handling the asset quality, particularly on their corporate book.

Jindal Haria, associate director, banking and financial institutions, India Ratings & Research, says, provisioning that PSBs have taken towards corporate loans is 70 per cent or even upwards. In fact, most PSBs currently work with a provision coverage ratio (PCR) upwards of 80 per cent and IDBI Bank, in particular, recorded the number at 94 per cent. These are never-seen-before levels of PCR, for state-run banks and even for the Indian banking system at large. “The overall position on PCR is much better now than before and much of the stress is well-recognised now. Additions hence could be limited,” says Haria.

What’s also providing comfort is the declining trend of slippages ratio or accretion of fresh NPA as a percentage of total loan book. As per CRISIL, slippages ratio for FY20 is pegged at 3.5 per cent, which is a little lower than the 3.7 per cent level seen in FY19 and nearly half of the peak slippages ratio of 7.4 per cent.

That said, Sitaraman of CRISIL warns that even at current levels, slippages ratio is far from the steady-state level of 2.5 - 3 per cent seen prior to the asset quality deterioration, about four – five years ago. This also means that while large corporate bad loans may not be a headache for PSBs any more, whether the incremental stress adding up from small loans could change the plot for PSBs is something that one can’t afford to take their eyes off from.

Among others, two factors will matter a lot for PSBs. The inter-creditor agreement or ICA signed among banks to resolve stressed loan accounts since June 2019 haven’t proved to be of much success so far. Instances such as Cox and Kings, Dewan Housing Finance and Jain Irrigation are testimony of the same and banks have started providing for these loan exposures. Clarity on nearly Rs 2.5 trillion loan accounts covered under ICA will be known in March quarter as the validity of these ICAs would have lapsed starting January 2020 and banks would have to provide for them starting from March 2020 quarter.

Similarly, while loans to micro- small and medium (MSMEs) get a one–year window for restructuring, stress is fast building in this segment warranting for higher extent of caution. While reminding that the recent regulatory dispensation is only with respect to standard assets, Siddharth Purohit of SMC Capital, says that MSME loans could soon pose the twin risk of asset quality deterioration and lower pace of growth for PSU banks. “What if the underlying economic situation doesn’t recover even after the dispensation, that is also equally a concern,” he adds.

Punjab National Bank’s MD & CEO, S S Mallikarjuna Rao has already guided for elevated stress in March’20 quarter and probably for the first quarter of FY21 coming from MSME and agri-loans. Interestingly, SBI’s chief, Rajnish Kumar in a post-results conference call indicated that debt wavier schemes have impacted recoveries and renewal of agri-loans, and slippages in this segment stood at Rs 2,900 crore in December’19 quarter.

The uncertainty for the entire banking system and more so for PSBs is that of recoveries. Analysts say Q3 numbers were significantly comforted by recoveries from Essar Steel. “Going into March quarter, there are no big recoveries to help the financials of banks,” Purohit adds.

There is some bit of stress building up on the retail loans front, too, for the entire banking sector, private banks included.

Therefore, while Q3 does instill confidence on asset quality front, ability to sustain this is more critical to turn positive on PSBs. With the finance minister lately nudging banks to raise capital on their own, it is imperative for PSBs to sustain the improvement lately seen in their financials.