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The Indian banking crisis is just beginning


Q3FY16 was another horror show for the PSB’s let’s have a look at the numbers of top 4 banks, because looking at numbers of all the 21 listed is injurious to our eyes and brains. Safe to say the other smaller PSU banks too have  embodied the competitive spirit by out doing each in terms of losses, provisions and NPA’s.
We gave you a preview of how bleak things were in an earlier article “Corporate India is addicted to debt” but compared to the Q3 number they look like a bunch of roses. The sudden jump in NPA’s, losses and provisions can be attributed to the RBIs mandate to clean up balance sheets of PSU’s by March 2017.
This article is a second in the series “The Next Big Crisis” aimed at taking a 260 view of the litany of issues plaguing the Indian banking sector.
Dr. Rajan has been on a warpath to tame the asset quality demon at a time when India is being projected as an island of growth amidst a worsening a global economic environment.  It can also be argued that the RBI recognized the problem a little too late and the steps taken so far haven’t nearly been enough. Yes it can be argued both ways but this is not a one song movie and the true nature of this mess is distorted beyond recognition.
This is not a problem that happened over night, it has been in the making for a long time and it shows the impotence, idiocy and ineptitude of our system and well as our policy makers. Bad loans are a function of the economy, there is nothing special about them but if banks do not take steps right from screening the applicants this current situation will be the result.
Indian banks including the private banks have been notoriously lax in screening loan applications and running background checks, most often than not knowing the right guy can be the difference between getting a loan or not. Rampant political interference, poor to absolutely useless managements are also root causes for the situation.
PSB’s have become playgrounds for shameless display of political influence up until recently. Though the situation has not changed overnight it has been decreasing considerably. The present govt has taken a number of laudable initiatives from Indradhanush to appointing CEO’s from the private sector but they have been found severely lacking against the magnitude of this problem. The only silver lining has been the relentless focus by both the finance ministry and the RBI.
Q3 in numbers
  • 11 out of 25 PSBs ending the quarter with a loss and the other eight witnessing a sharp fall in profit (between 59 and 93%) compared to the year-ago period.
  • Provisioning for bad loans hit Rs 44,000 double YoY
  • The listed universe of PSB’s reported a combined net loss of nearly 11,000 crore against a profit of Rs 33,613 crore in the same quarter last year
  • The total recognized gross non-performing assets (NPAs)stood at almost Rs 440,000 crore jumping by over 50%.
  • Average gross NPA ratio of public sector banks stood at 7.32 per cent nearly three times that of private sector banks excluding CDR and SDR.
It is estimated that 85% of the stressed assets lie on the books of PSB’s. To truly understand how tall the NPA mountain is here is a comparison.
Stressted Assets In Indian banks
The combined level of NPAs and restructured assets is 14%–or one rupee in seven–of all loans made by India’s public-sector banks, close to Rs 8 lakh crore ($117 billion). This amount, higher than the gross domestic product (GDP) of Oman, Sri Lanka and Myanmar, is potentially at risk. – IndiaSpend
The Indian Express newspaper on Feb. 09 had reported that PSB’s have written off bad loans worth Rs1.14 lakh crore between 2013 and 2015 fiscal years,
The problems facing the PSB’s are not just limited to the non performing assets but are a lot deeper. The cost to income ratios have been steadily increasing over the years, meaning PSB’s are spending more money to earn every single rupee than they ever did in the past 10 years. This comes at a time when the CIR for private banks has hit a five year low.
Financial Express
Between April 2013 and December 2015 21 PSB’s have set aside Rs 2.35 lakh crore as provisions, that is nearly seven times the amount infused by the government into these banks. These numbers come against the backdrop of an increasing desperation for capital infusion into these state-owned banks.
The dramatic rise in stressed assets and losses is that is a vindication of a long known fact that PSB’s have been hiding the true extent of the mess. Without an able management and a Chinese wall between the government and the banks this wont be the last asset crisis successive governments will face.
There is also a creeping fear that the troubles in the banking sector run deeper than the picture painted in the quarter gone by. The RBI has listed 150 truant borrowers and directed banks to downgrade those firms and provide provisions for. While it is true that the top Indian conglomerates account for a disproportionate amount of stressed loans (12% ) many more are expected to join further worsening the crisis.
Experts estimate that an amount of about 1,00,000 to 5,00,000 crores is required by FY 17. The results will deteriorate further with all the banks except BOB taking 50 per cent of the RBI mandated bad loan classification. India ratings estimates that PSB’s would require 3.7 lakh crores between FY 2017 and 19.
CRISIL recently issued a “Credit Alert” on PSBs citing worsening asset quality issues. In the past 18 months, CRISIL has either downgraded or revised its outlook to ‘Negative’ on nine out of the 25 PSBs that it rates. In May 2015, it had estimated weak assets in banks to rise to a high of around Rs.5,30,000 crore or 6.3% of total advances by March 2016.
Fitch in its recent press release said “The stand-alone credit profile of many Indian public sector banks should come under pressure unless there is meaningful action to restore capital adequacy,” Further it said that the estimated capital need for the system of $140 billion may need to be reassessed given the mounting losses in the system. It is “unusual” for RBI to be driving state-owned banks to raise provisioning so quickly, which indicates that earnings pressure will continue in the fourth quarter of this fiscal and possibly beyond, Fitch added.
“Fitch believes RBI’s intention to clean-up bank balance sheets by FY17 as a pre-requisite to kick-start credit growth could help to revive investor confidence in public-sector banks. But the suddenness and speed of the provisioning in 2HFY16 highlights how long it has taken to address poor balance sheets,” said Guha. “It also raises questions over the pace and implementation of bank recapitalization and reforms, especially when central bank intervention is required in identification of bad assets,” he added.
S&P on Tuesday warned that the capital requirement of the banks for provisioning might shoot up leaving them open to downgrades. “We believe Indian public sector banks are in a weaker position on the capitalization front than their private sector peers,” said S&P’s credit analyst Deepali Seth in a report.
The government has come under increasing pressure off late to enlarge the capital infusions into the PSB’s as losses and NPA’s have hit record highs. Stake sale is not an option given that almost all the PSB’s are trading near record lows. “Indian public sector banks might find it difficult to raise capital, given their currently weak operating performance, which made it difficult for them to access the equity capital markets,” said Standard & Poor’s credit analyst Deepali Seth.
The govt and the RBI recently promised to provide adequate capital to the banks, but this is a vicious circle that will continue unless the capital comes with performance riders. Taxpayers cannot continue to foot the bill of these inept and useless banks. The same money can be used to breathe life into the crumbling public health-care, education, infrastructure and more.
State owned banks also are running the risk of RBI restrictions as many reported ROA of less than 0.25% . “Prompt corrective action is invoked if either, net NPAs goes above 10 per cent, capital adequacy ratio (CAR) falls below 9% or RoA falls below 0.25%.”
13 listed public sector banks, out of 21, reported lower than 0.25 per cent RoA for the nine month period ended 31, December. It is an important figure since a breach of level leads to imposition of restrictions as defined by the  ‘Prompt Corrective Action’ guidelines.
Net NPA of Dena bank which reported a negative RoA for the first nine months of the current financial year, is at 6.68%, UCO Bank, which also reported negative RoA posted NPA at 6.51%. United Bank of India, reported 0.14% of RoA with NPA standing 5.91%.
Here is a look at the comparison of PSB’s and private banks for the quarter gone by.
Business Standard
Business Standard
Business Standard
Business Standard
The top 4 of the most useless banks based on market cap and uselessness.
The king of inept banks.
State Bank Of India-SBI’s net fell  62% to Rs.1,115 crore for the December quarter vs Rs2,910.06 crore in the same period of the last fiscal. Loan loss provisions spiked sharply by  59% to Rs.7,645 crore due to the provisions made for the bad loans.
Gross NPA rose by 28.1 per cent year-on-year (yoy) to Rs 72791.73 crore due to fresh slippages of Rs 20700 crore v/s Rs 5880 crore in 2QFY16. Gross NPA ratio increased by 95 basis points (bps) to Rs 5.10 per cent. Net NPA grew by 40.8 per cent to Rs 40,249.12 crore in Q3 and net NPA ratio increased by 75 basis points to 2.89 per cent. NPA ratio shot up to 5.1% from 4.15% in the previous quarter.
NII showed a degrowth of 1.2 per cent yoy and 4.5 per cent qoq due to the write backs and slippages. The total restructured assets in end-December amounted to Rs.121,389 crore
The Indian Express newspaper on Feb. 09 had reported that PSB’s have written off bad loansworth Rs1.14 lakh crore between 2013 and 2015 fiscal years, and 40% of these loans were waived by SBI.
Usless bank number 2
Bank Of Baroda had the dubious honor of posting the highest ever losses in the history of Indian Banking. It posted a net loss of 3, 342 crore in the quarter ended December 2015 on the back of provisions for bad loans rising over five times, it had posted net profit of Rs 333 crore in the same period last year. The losses would have much much higher if not for a Rs.1,118 crore tax write off taken during the quarter.
Net interest income fell Rs 2,795 crore from Rs 3,286 crore a year ago. BOB’s  provisions for bad loans grew to Rs 6,474 crore, nearly five times more than Rs 1,149 crore in Q3 last year
The gross NPA percentage for the bank rose to 9.68 per cent from 3.85 per cent last year. Net NPA spiked up from 2.11 to 5.67%. Fresh slippages during Q3 were Rs 15,603 crore. Fresh slippages during Q3 were Rs 15,603 crore. GNPA rose 64.2% QoQ to Rs 38,934 crore (9.68%) while net NPA rose 70% to Rs 21,806 crore.
Absolutely useless bank number 3
Punjab National Bank reported a 93.4 per cent drop  in net profit to Rs 51 crore in the third quarter, compared with Rs 775 crore. Total income rose to Rs 13,891.2 crore for the quarter, up 7.64 %, from Rs 12,904.85 crore in the same quarter last financial year.
Gross NPAs as a percentage to total advances rose to 8.47 per cent from 5.97 per cent in the same quarter an year ago. Net non-performing assets (NPAs) shot up to 5.86 per cent from 3.82 per cent at the end of December 2014, the bank said.
Gross NPA rose 38 percent at Rs 34338 crore in Q3 against Rs 240945 crore (QoQ). Net NPA jumped 51.3 percent at Rs 22,983 crore in Q3 verus Rs 15,187 crore (QoQ). Total provisions rose by over two and a half times to Rs 3,775.53 crore as against Rs 1,467.77 crore in the year-ago period.
A disgrace of a bank number 4
IDBI bank too laid its claim for fame by posting the second highest loan ever by an Indian bank. You have to admire the competitive spirit of IDBI. It reported a net loss of Rs.2,183.68 for the quarter ended December against a net profit of Rs.102.79 crore same period last quarter.
IDBI bank has become the poster child of how deep the rot has spread in among the PSB’s.
Provisions for the quarter rose 289% to Rs.3,722.67 crore from Rs.956.25 crore in the same quarter last year and 188.7% at Rs.1,289.31 crore at the end of September.  Non-performing assets rose 202 basis points sequentially to 8.94 percent and net NPA climbing 144 bps to 4.6 percent in Q3.
In absolute terms, gross NPA jumped 33 percent QoQ to Rs 19,615 crore and net NPA spiked 48% to Rs 9,613 crore in quarter ended December 2015. Fresh slippages rose dramatically to Rs 5,839 crore from Rs 1,373 crore sequentially.

Article By:
Bhuvanesh Reddy

Write comments
  1. This banking crises will show its face on stock price much more in coming months!

  2. Sir How do banks recover non-performing assets NPA?