With operating losses of over `50,000 crore in the March quarter and the likelihood of a few more large corporate exposures going bad, the woes of state-run lenders aren’t over yet. Their gross non-performing loans at the end of March might be lower at `7.7 lakh crore but there could be a reversal in the event some companies go bust or fetch a low value following the insolvency process. Moreover, with the economy slowing sharply —GDP grew just 5.8% year-on-year in the March quarter—, there are concerns credit exposures could turn toxic in sectors such as agriculture, real estate and NBFCs.
“The government has infused `2 lakh crore of capital over the past two years, including `52,000 crore this quarter, a large part of which has been used to increase provisioning and given the elevated credit costs, they continued to report losses even in Q4,” analysts at Credit Suisse noted.
Hamstrung by deteriorating asset quality, state-owned lenders have not been able to disburse loans as much as their private sector peers have done.
For instance, Bank of Baroda’s credit-deposit ratio in 2017 was just 64% and rose to 72% in 2018.
In contrast, ICICI Bank’s CD ratio was 95 and 91% in the two years, respectively.
Data from the Reserve Bank of India (RBI) showed total bank credit to companies and individuals slowed to 11.9 % year-on year in April. Loans to purchase vehicles grew at sub-5% y-o-y while other personal loans increased at 21.4% y-o-y compared with 35.5% a year ago. Loans to micro and small units grew at 1% y-o-y while credit to medium enterprises were up 3.5%.
While banks have set aside capital for stressed accounts such as Bhushan Steel, Electrosteel Steels and Monnet Ispat exposures to Jet Airways, entities related to Infrastructure Leasing & Financial Services (IL&FS) group and some non-banking financial companies (NBFCs) facing downgrades continue to be a source of concern. A full resolution in the three large NPA accounts of Essar Steel, Bhushan Power & Steel and Alok Industries could have further eased the NPA burden. Banks expect these to come through in the first half of FY20.
Also, the improvement in asset quality may not have been broad-based with some lenders continuing to struggle. State Bank of India’s (SBI) gross NPAs fell 23% year-on-year (y-o-y) to `1.73 lakh crore. Rajnish Kumar, chairman, SBI, said the bank has now managed to get a grip on slippages.
“If I look at the bank performance on various fronts, asset quality we have done very well. We have controlled fresh slippages that is very important. For all the past legacy accounts, we have made more than required provisions,” Kumar said after SBI’s Q4 results were declared. The SBI chairman also guided for a 1% credit cost for fresh slippages going forward.
United Bank of India, which turned profitable in Q4FY19 after seven consecutive quarters of losses, saw the highest reduction in bad loans. Its gross NPAs fell 27% y-o-y to `12,053 crore.
Among private banks, ICICI Bank was the most successful in improving its asset quality, with gross NPAs dropping over 14% y-o-y to `46,292 crore. Analysts expect fresh stress to remain under control at ICICI as well. In a post-results note, Nomura wrote that the bank’s exposure to new stressed names that emerged over the past six months is fairly low and is reflected in the negligible additions to its BB and below-rated book. “With NPA coverage at over 70%, we expect near-normalised slippages in FY20,” analysts said in the note.
Among the banks that saw the value of gross NPAs soar in the March quarter of FY19 is Yes Bank. After a change in management, the bank’s gross NPA pile shot up over 200% y-o-y to `7,883 crore. The management told analysts that while the bank had recognised an airline account, believed to be Jet Airways, and exposures to an infrastructure conglomerate (IL&FS) as NPAs, credit costs could remain at 1.25% in FY20.
IndusInd Bank saw a 131% y-o-y increase in gross NPAs to `3,947 crore as its exposure to IL&FS entities were classified as NPAs. Analysts see more pain ahead for the bank. In a recent report, Jefferies wrote that apart from IL&FS, IndusInd Bank has disclosed `3,500 crore worth of fund-based and non-fund-based exposures to ADAG, the group Essel, Dewan Housing Finance and a few other companies. “As a result, provisions could be higher in FY20, although earnings may recover in FY21,” the report noted.