Rs 2.68 lakh crore. That’s about half of India’s estimated fiscal deficit for FY17, and that’s the value of gross bad loans of just five of India’s top public sector banks.
For government-owned banks, FY16 has been a painful year. They’ve been forced by the Reserve Bank of India to identify and provide for a large number of non-performing assets on their books through what was called the asset quality review.
The Profitability Problem
Three out of five of the top PSU banks reported a net loss in the fourth quarter. Of them, Punjab National Bank was the worst performer, reporting the worst quarterly loss ever recorded in Indian banking history at Rs 5,367.10 crore.
State Bank of India, the largest of the five, reported a net profit of Rs 1,263.81 crore, 66.3% lower than the same period a year ago.
Bad Loan Surge
Some large banks chose to fast-track the identification of bad loans in the third quarter, and as a result, the increase in NPAs in the fourth quarter wasn’t as sharp.
Some others, however, decided to wait and monitor some large accounts in the third quarter, hoping that problems would be resolved.
The five banks in the graph below saw their cumulative gross non-performing assets rise over 33% sequentially to Rs 2.68 lakh crore.
The worst offenders are Bank of India, whose GNPAs are now 13.07% of advances, and Punjab National Bank, whose GNPAs rose to 12.90%.
Rising Provisioning Burden
A direct consequence of the sharp rise in non-performing assets was aggressive provisioning. The five banks mentioned above cumulatively increased provisioning by over 65% just over the course of the quarter.
When a loan becomes a non-performing asset, banks have to mandatorily set aside funds as a provision against default. This is accounted as an expense, and impacts the bottom-line.
Of the five banks, Punjab National Bank recorded the sharpest sequential increase in provisions at an eye-popping 177.7%.
Revenues from Core Operations
Only Punjab National Bank saw a sequential decline in net interest income, an indicator of the increase in revenues of the bank from core operations. Its net interest income declined by nearly 33% to Rs 2,767 crore. The rest recorded moderate increases in NII.
Margins: Mixed Trend
The net interest margin is a reflection of the operational performance of the bank in its core business – taking deposits and disbursing loans. Bank of India, Union Bank, and State Bank of India all saw their NIM largely unchanged from the previous quarter.
Bank of Baroda’s NIM rebounded to levels seen in the second quarter. It reported a 43 basis-point sequential improvement in NIM to 2.15%.
The outlier once again was Punjab National Bank, whose NIM fell 27 basis points to 2.60%
Having identified a large part of the bad loans in the system, banks will now turn their attention to resolution. Some take solace from the fact that a step has been taken in the right direction to clean up the NPA mess, but others are concerned that there is still much more asset quality pain around the corner in FY17.
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