Uneasy Calm At PSU Banks As Stress Lurks Beneath The Surface

An analysis of 11 state-run banks that have reported their fourth-quarter earnings shows that gross non-performing assets ratio for most lenders fell compared to a year ago. Punjab National Bank was the exception and saw bad loans as a percentage of its advances rise.

Even as bad loan ratios improved compared to a year ago, they remain high. Seven of the 11 public sector banks still have a gross NPA ratio of above 10%.

Central Bank of India, Punjab National Bank, Bank of India, Punjab and Sind Bank and Union Bank of India have the highest gross NPA ratios.

In absolute terms, too, a number of banks saw a decline in bad loans, although some of this could have been due to write-offs. Banks are not required to disclose the quantum of loans written off.

Gross bad loans at UCO Bank fell 41% to Rs 11,352 crore, followed by Bank of Maharashtra that saw a drop of 36% to Rs 7,780 crore in fiscal 2021. India’s largest lender State Bank of India, too, managed to reduce its gross bad loans by 15% to Rs 1.26 lakh crore.

Union Bank saw bad loans drop 8%, Punjab and Sind Bank reported a 5% decline while Punjab National Bank reported a smaller decline of under 1%.

Even as gross bad loans dropped for state-run lenders, a broader measure of stressed assets—computed by adding loans already tagged as NPAs and those that are overdue by 61-90 days, shows a higher level of stress.

Data for special mention accounts, which fall in the 61-90 day overdue bucket or SMA-2 category, isn’t disclosed by all banks.

When taken together, Central Bank of India, Punjab National Bank and Punjab and Sind Bank have the highest level of stressed assets at over 18%.

To be sure, not all of the loans overdue by 61-90 days will turn into NPAs. Recoveries and the restructuring window reopened by the Reserve Bank of India may help keep reported NPAs in check.

The first restructuring window, which allowed for restructuring of retail, MSME and corporate accounts, also helped keep stress in check for government-owned lenders.

As of March, the total loans restructured by PSU banks stood at Rs 25,438 crore. Advances restructured are spread out over retail, MSME and corporate loans.

Stress in personal loans won’t be a worry for public-sector banks due to their relatively higher share of secured loans compared to the private sector, said Anand Dama, analyst at Emkay Global Financial Services. However, stress in the micro, small and medium enterprises and agriculture loan segments may be a concern.

“While a bulk of stressed assets in the legacy corporate accounts have already been recognised and are largely provided for, stress has been building up in MSME and agriculture segments, which will need to be monitored closely,” he said.

While these lenders still have a significant amount of legacy stress to deal with and fresh bad loans could build up because of the continuing Covid-19 crisis, capital levels are healthier.

The availability of capital has allowed banks to provision more and bring down net NPA ratios quicker.

“Provision cover for public-sector banks has also largely improved and most of them now have at least over 60% coverage on their legacy corporate loan portfolios,” said Pritesh Bumb, senior research analyst at the brokerage Prabhudas Lilladher Pvt.

Even after provisioning against existing stress, capital buffers improved both sequentially and on year-on-year basis for most banks.

This could mean that need for additional capital, particularly from the government, may be limited.

“As the legacy book has been largely resolved or provided for, incremental slippages which will come on account of MSME, agriculture and some portion of retail loans, should mostly be manageable from their own balance sheets,” he said.

Still, rating agencies expect some of these lenders may need to raise additional capital. In January 2021, even before the second wave of Covid-19 hit economic activity, ICRA had estimated these lenders would need additional capital of about Rs 43,000 crore.

However, these capital requirements could rise further as the second Covid wave delays improvement in PSU banks' earnings till next year, said Anil Gupta, vice-president and head of financial sector ratings at ICRA. "In that case, the ability of public sector banks to raise further capital may also get negatively impacted," he said.