The caution suggests banks are somewhat worried about asset quality even as the moratorium camouflages the true quality of the loan book.
A clutch of twelve public sector banks (PSBs) has set aside about 80% of their aggregate operating profits they made in the June quarter as provisions turning cautious on accounts under moratorium, data from Capitaline shows. This is higher than the comparable amount of nearly 60% for private banks but lower than the roughly 130% that the PSBs set aside in the March quarter.
However, the Q4FY20 numbers are not strictly comparable with those for Q1FY21 as they do not account for the six smaller banks which were merged with four larger ones, effective April 1. The two banks that provided most aggressively – Punjab & Sind Bank and Bank of Baroda (BoB) – were the only two PSBs to report losses for the June quarter.
The caution suggests banks are somewhat worried about asset quality even as the moratorium camouflages the true quality of the loan book. Provisions also moved up due to some large accounts which have not been resolved, given the uncertain environment.
BoB said that it was taking excess provisions under the Reserve Bank of India’s June 7 circular for an exposure that had slipped but needed to be reported as a standard account as it was government-guaranteed. The bank holds total provisions of Rs 2,500 crore against this account, of which Rs 1,100 crore was made in the June quarter.
Sanjiv Chadha, MD and CEO, BoB, said the lender expects this provision to be written back over the next few quarters. “So, we see this provisioning as something which will be available to the bank in subsequent quarters for Covid-related stress, should it arise,” he added. This apart, BoB set aside Rs 700 crore in provisions against other standard assets which are seeing stress on account of the pandemic. The lender’s provision coverage ratio (PCR) at the end of June was 83%.
State Bank of India (SBI), which made provisions equivalent to 69% of its operating profit, also said it was building larger buffers than mandated. SBI chairman Rajnish Kumar said, “We have decided to enhance the provision or accelerate the provision over the minimum regulatory (requirement) and one account which is worth mentioning is which was declared fraud and a dispensation for four quarters is available. But, within this quarter, the entire amount has been provided and net NPA is zero.” The bank expects a significant recovery from this fraud account in the December quarter.
While concerns around corporate asset quality have not fully blown over, analysts expect the first wave of post-moratorium bad loans to emerge from the retail and micro, small and medium enterprises (MSME) segments. Moody’s said recently that in its base-case scenario, PSBs will need external capital of up to `2 lakh crore in the next two years. This is because their credit costs will increase to 3% of gross loans, annually over the next two years, from 2.5% in FY20. “These levels of credit costs are required for banks to boost provision coverage ratios to 70% against enlarged pools of NPLs by March 2022 from their current levels of about 65%,” Moody’s said.