Past imperfect, present better, future uncertain

Incidents of corporate loans turning bad could be less than anticipated, but the banks' challenge will be retail loans. Large-scale job losses will have a bearing on the retail portfolio

With the December quarter coming to an end and most bankers putting on a brave face, announcing their resilience to take on the Covid-19 pandemic, let’s take a close look at how the listed banks have fared in the last quarter.

Overall, 31 listed banks have announced Rs 27,717 crore net profit for the September quarter against just about Rs 7,166 crore in the year-ago quarter. As a group, public sector banks (PSBs) have performed better than their private sector peers with their net profit rising many times more, albeit on a smaller base.

Among private banks, only one entity, Lakshmi Vilas Bank Ltd, has posted loss — Rs 397 crore, after a Rs 112 crore loss in the previous quarter. It has recently been merged with DBS Bank Ltd’s Indian subsidiary.

All PSBs are in the black. Their list is short, following the consolidation drive, and hence not strictly comparable with the past performance. Two of them that have kept their individual identities along with a few others, Uco Bank and Indian Overseas Bank (IOB), continued their good run. For Uco Bank, the September quarter net profit is Rs 30 crore, higher than Rs 21 crore posted in June and Rs 17 crore in March. The Kolkata-headquartered bank took 17 quarters and over Rs 16,000 crore loss up its chin to come back in the black. IOB, too, raised its net profit from Rs 121 crore in June to Rs 148 crore in September. It had been through a stretch of 18-quarter net losses, to the tune of around Rs 25,000 crore.

By now, posting net profit has become a habit with IDBI Bank Ltd, which is in the basket of private banks for this analysis. In the September quarter, its net profit has been Rs 324 crore after a Rs 144.43 crore net profit in June and a Rs 139 crore net profit in March. Before that, IDBI Bank had piled up close to Rs 42,000 crore losses for 13 successive quarters.

Among others, the State Bank of India’s (SBI) Rs 4,574 crore net profit in the September quarter has been 52 per cent higher than the year-ago quarter; Bank of Baroda posted Rs 1,679 crore net profit after a Rs 864-crore loss in the previous quarter; and Union Bank’s net profit has been Rs 517 crore against a Rs 1,194-crore loss in the year-ago quarter. In the pack of private banks, ICICI Bank Ltd has a stellar show — Rs 4,215 crore profit against Rs 655 crore in the year-ago quarter and Rs 2,599 crore in June.

Barring LVB, all banks have made operating profits but compared with net profit, the growth in operating profit for the industry has been modest — Rs 92,074 crore versus Rs 77,088 crore in September 2019 and Rs 90,010 crore in the June quarter. Here too, the PSBs have fared better than the private banks. Four banks, including SBI, have shown a drop in operating profit compared with the year-ago quarter.

Despite a modest growth in operating profit, how have their net profit grown manifold? The key contributing factor is lesser provisions for bad assets. At Rs 53,742 crore, there has been a 4.65 per cent drop in provisions compared with the September 2019 quarter; the decline is even sharper — 14.75 per cent — from the June quarter.

They could afford to do so since the pile of bad loans has been coming down. The gross non-performing assets (NPAs) of the universe of listed Indian banks have come down from Rs 8.35 trillion in June to Rs 7.91 trillion in September. A year ago, the gross NPAs were Rs 8.08 trillion. Needless to say that the PSBs’ share in the pile is disproportionately higher compared with their share in the industry’s loan portfolio. The drop in net NPAs, even after modest provisioning, has been sharper — from Rs 2.95 trillion in September 2019 to Rs 2.10 trillion in September 2020, close to 29 per cent.

As a percentage of the loan book, IDBI Bank’s gross NPAs have been the highest — 25.08 per cent. Two other banks have more than 15 per cent gross NPAs — Central Bank of India and Yes Bank Ltd. At least five PSBs — Union Bank of India, Bank of India, Punjab National Bank (PNB), IOB and Uco Bank — have gross NPAs between 11.62 per cent and 14.71 per cent. Among PSBs, SBI has the lowest gross NPAs (5.28 per cent), while at least four private banks, including ICICI Bank, have more than 5 per cent but less than 10 per cent gross NPAs.

After setting aside money, the net NPA graph looks better. Only the Central Bank of India has more than 5 per cent net NPAs (5.6 per cent) and four others more than 4 per cent. They are PNB (4.75 per cent), Yes Bank (4.71 per cent), IOB (4.30 per cent) and Union Bank (4.13 per cent).

Most importantly, all banks have shown a decline in both gross and net NPAs in percentage as well as absolute terms. That’s a good story but it will not continue. The last Financial Stability Report (FSR) of the Reserve Bank of India, a bi-annual health-check for the banking industry, released in July, had indicated that gross NPAs of all commercial banks might rise from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. Under a very stressed scenario, the ratio may escalate to 14.7 per cent. According to the report, the worst hit will be the PSBs, which could see their gross NPA ratio rising to 15.2 per cent by March 2021 from 11.3 per cent in March 2020.

By December-end, the next FSR is due. Since most banks are seeing that an increasing number of borrowers have started servicing their loans and not too many are opting for loan restructuring, one can expect that the NPAs will not rise as much as the banking regulator’s stress test had indicated in July. In fact, we may find the December report paring the figures. One thing is for sure — the incidents of corporate loans turning bad could be less than anticipated, but the banks’ challenge will be the retail loans. Large-scale job losses will have a bearing on the retail portfolio, traditionally a safe bet for the banking industry.

Yes, most banks have raised the wall of provisioning against bad loans and many have set aside money to ward off the Covid pandemic impact, but we need to wait for a few quarters before we are convinced that the banking system is strong enough to stand tall even after the recession.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. | Twitter: TamalBandyo | His latest book is Pandemonium: The Great Indian Banking Tragedy