A man walks between cars outside the head office of Allahabad Bank in the BBD Bagh area of Kolkata, West Bengal, India. Photographer: Sanjit Das/Bloomberg

Eleven Banks Under Corrective Action Report Over Rs 10,000 Crore In Q2 Losses

The eleven government-owned banks which are under the Reserve Bank of India’s corrective action framework continue to report large losses, as they slow growth and top-up on provisions against their large pool of stressed assets. The slow pace of resolution under the insolvency process has meant recoveries remain low and losses remain high.

The revised prompt corrective action, which imposes strictures ranging from curbs on branch expansion to lending, has become a flash point between the government and the RBI. The government argues that the framework is hindering the flow of credit to the economy, while the RBI argues that allowing these banks to lend heavily until they strengthen their balancesheets is imprudent.

Quarterly earnings data collated by BloombergQuint shows that the process of balance sheet repair remains painfully slow.

Large Losses

Cumulatively, these eleven banks reported net loss of Rs 10,197 crore. Three banks reported small profits while other continued to be in the red.

Between the June 2017 quarter and the September 2018 quarter, these banks have collectively reported losses of Rs 69,325 crore. BloombergQuint has taken data from the June 2017 quarter since the new toughened framework was announced in April 2017, following which these banks were placed under it at different points in time.

“At the profit-before-tax level, which is more critical for these banks in comparison to the net profit, nearly all banks have continued to report losses,” said Anil Gupta, head of financial sector ratings at ICRA. A number of banks have used tax write-backs to reduce net losses in previous quarters and in the September-ended quarter.

Provision Coverage Improves

The losses have been a result of increased provisions, needed to cover for bad loans, and weak core income growth, which is a result of curtailed lending operations. The former -- the need to build an adequate cover of provisions -- is one of the key objectives of the PCA framework.

On that count, most banks have made significant progress.

All eleven banks now have a provision coverage ratio above 60 percent, shows the data. A few are coming close to hitting a provision coverage ratio of close to 70 percent, which is considered healthy.

However, the increased provisions have taken a toll on profitability.

Banks under the PCA have seen weak loan growth as a result of the restrictions that have been imposed on them. Weak topline growth and higher provisioning has taken a toll on their profitability.
Suresh Ganapathy, Associate Director - Banking and Financial Services, Macquarie Capital Securities

Bad Loan Ratios Remain High

While banks have put aside more provisions, their bad loan ratios remain high. This is because slippages have continued and a fall in advances growth has keep the ratios elevated.

Notably, all eleven banks continue to have net NPA ratios well above the threshold level of 6 percent. As part of the revised framework, the RBI had said that banks with a net NPA ratio of 6-9 percent will fall under risk category 1, while those with a net NPA ratio between 9-12 percent would be in the second risk category. Banks with more than 12 percent net NPA would fall in the third risk category.

As of the end of September, four banks had net NPAs more than 12 percent. IDBI Bank has the highest net NPA of over 17 percent, while Bank of India is the closest to the lower end of the threshold with a net NPA ratio of 7.6 percent.

Apart from net NPAs, the framework assesses capital levels and return on assets of weak banks.

Though net NPAs of some banks may appear to have improved, slippages have remained high because of which gross NPAs have continued to rise. There have been no resolutions in the second quarter but there should be some improvement because of expected resolutions in some large cases like Essar Steel in the coming quarters.
Anil Gupta, Head - Financial Sector Ratings, ICRA

Capital Levels Remain Low

The large losses have meant that capital levels at these banks remain low and, in some cases, close to minimum capital requirements laid down by the Basel-III rules.

As of the end of September, two banks reported a common equity tier-1 (CET-1) ratio below the minimum requirement of 5.5 percent. Allahabad Bank has since received more government capital, while IDBI Bank is awaiting funding from LIC, which is set to assume promotership of the bank.

Even beyond these banks, most banks have low capital levels and may need further capital. Overall, public sector banks will need Rs 1.2 lakh crore in fresh capital by March 2019 to meet regulatory requirements, ratings agency CRISIL said in a report earlier this month.

The estimated capital requirement is Rs 21,000 crore more than the Rs 2.11 lakh crore bank recapitalisation plan announced by the government in October last year. Over the past 18 months, Rs 1.12 lakh crore has been infused, leaving a requirement of Rs 99,000 crore according to the original plan, said the report.

Loan Growth Crimped

Low capital levels and restrictions on lending to high risk segments has forced most of these banks to slow approval of fresh advances.

This, the government argues, could hurt the broader flow of credit to the economy. The RBI, however, has argued that the gap left by these lenders is being filled by private banks. Bank credit growth data suggests that this is indeed the case. Credit growth is currently in double digits and has been above 12 percent over the last few fortnights.