PSU Banks’ Bad Loans Drop 12% In FY19 As Stressed Asset Cycle Turns

Nearly four years after a grueling bad loan clean-up hit India’s lenders, banks have started to see a decline in stressed assets, albeit at a moderate pace. The drop in bad loans is being driven by some recoveries via bankruptcy proceeding, a slower build-up of fresh bad loans and increased write-offs.

Quarterly earnings data available for 20 of 22 listed government banks shows that these lenders saw a 12 percent year-on-year decline in gross non performing assets to Rs 7.74 lakh crore as on March 31, 2019. A year ago, gross NPAs stood at Rs 8.77 lakh crore, shows data compiled by BloombergQuint.

Dena Bank and Vijaya Bank, which are yet to disclose fourth-quarter earnings ahead of an impending merger with Bank of Baroda, have been excluded from the study. IDBI Bank has been recently reclassified as a private bank but has been retained as a PSU bank for the purpose of this study since it was classified as a government-owned lender in the comparative period.

The 15 listed private sector banks reported a 2.4 percent increase in gross NPAs to Rs 1.24 lakh crore in FY19, primarily due to an increase in bad loans reported by Yes Bank Ltd. and IndusInd Bank Ltd.

For the 35 of 37 listed scheduled commercial banks which have reported fourth-quarter earnings, gross NPAs stood at Rs 8.98 lakh crore at the of March 2019, compared to Rs 9.9 lakh crore a year ago. That’s a decline of 10 percent over the course of the year.

What Drove The Decline?

During the year, most banks reported a drop in slippages, which aided the drop in gross bad loans. Technical write-offs of bad loans, where full provisions have been made and the chance of immediate recovery is low, also helped bring down reported non performing assets.

State Bank of India reported gross slippages at a little over Rs 39,000 crore in FY19, as compared with over Rs 1 lakh crore in FY18. For Bank of Baroda, the fresh slippages of just over Rs 10,000 crore during FY19, were half of what they were a year ago. Among the large private banks, ICICI Bank Ltd. and Axis Bank Ltd. also reported lower slippages.

There were exceptions.

Yes Bank reported higher slippages in the fourth quarter, which pushed up its gross bad loans to Rs 7,882 crore in March 2019, as compared with Rs 2,627 crore a year ago. IndusInd Bank Ltd., too, saw its gross bad loans rise to Rs 3,947 crore as of March 2019, compared with a little over Rs 1,700 crore a year ago, primarily due to the bank’s exposure to the Infrastructure Leasing & Financial Services group.

In addition to lower slippages, some recoveries came through following resolutions under the Insolvency and Bankruptcy Code.

Net NPAs Fall Faster

The financial year gone by also saw lenders step up provisions against bad loans, which led to a bigger fall in net NPAs, shows the data. The increase in provision coverage ratio and the notable fall in net NPAs is encouraging as it suggests cleaner bank balance sheets.

Most government banks reported a provision coverage ratio of close to or above 70 percent, which is considered optimal. Public sector banks were in a position to step up provisions after the government infused over Rs 1 lakh crore in capital into these lenders during the financial year.

Provisioning was higher in FY19 as banks had to provide for ageing of NPAs, said Kajal Gandhi, chief manager at ICICI Securities Ltd. As per the RBI’s ‘Income Recognition and Asset Classification’ rules, banks have to increase provisions against a bad loan account based on how long it has been classified as such.

Banks have also resorted to using additional provisioning to clean up their books, said Lalitabh Shrivastawa, assistant vice-president for research at brokerage house Sharekhan. “While NPAs were higher earlier on account of higher slippages, the pipeline looks much thinner now.”

Volatile Profitability

Higher provisions have meant that net losses for public sector banks remained high, even though they reduced compared to a year ago.

The 20 of 22 listed public sector banks, who have reported fourth quarter earnings, had cumulative losses of Rs 31,112 crore. This is roughly half the net loss of Rs 61,634 reported by these lenders a year ago.

For private banks, the cumulative net profit stood at Rs 9,011 crore compared with Rs 7,204 crore a year ago.

Large public sector lenders like Bank of Baroda and Punjab National Bank reported surprise losses as they provided more against accounts which have seen a delay in resolution. IDBI Bank, too, reported a Rs 4,918-crore loss in the January-March period owing to similar reasons. Among private banks, Yes Bank reported a surprise net loss of Rs 1,506 crore in its first quarter under a new chief executive.

A Better Year Ahead?

Analysts and bankers expect that FY20 will see further improvement in bank balance sheets.

The current financial year is expected to be positive for the banking sector with a reduction in stressed assets and an improvement in credit growth, said Anil Gupta, sector head, financial sector ratings, ICRA Ltd. Gupta added that many public sector banks will return to profitability in FY20.

ICRA expects the gross NPA and net NPA ratios of public sector banks will decline to 8.1-8.4 percent and 3.5-3.6 percent by March 2020, as accretion of fresh bad loans slows and provisioning needs decline.

While banks will see improvement in FY20, slower-than-expected recoveries from cases under insolvency will continue to hurt lenders.

Timelines under IBC have not been met and the uncertainty over resolution of large bad loans remains, particularly for small banks, said Saswata Guha, director for financial sector ratings at Fitch Ratings India.