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Deep surgery leaves bank balance sheets bruised

business Updated: May 30, 2016 07:30 IST

NEW DELHI/MUMBAI: Reserve Bank of India (RBI) governor Raghuram Rajan could not have been more appropriate when he said in February that financial results of banks in India have not been pretty.

Or as Rajan put it: either banks can apply band aid and hope things will get better or try to get the projects started. The latter might involve “deep surgery”.

Three months later, most banks’ books show that lenders aren’t willing to allow the bad loans, which have risen due to slow growth and delays in project implementation, to fester any longer.

Last week, Punjab National Bank (PNB) reported the worst-ever quarterly loss — Rs5,367 crore — in India’s banking history after over Rs15,000 crore of restructured loans slipped into the non-performing asset (NPA) category during the January-March quarter, following RBI’s stringent asset quality review (AQR).

But for a tax write-back of Rs1,890 crore, the quarter’s loss would have been more, mirroring the bank’s failing health from a Rs306.56 crore profit it posted a year ago. A tax write-back means that previously made provisions are reaccounted as income.

On Friday, State Bank of India (SBI), the country’s largest lender, reported a 66% drop in profits in the fourth quarter amid piling bad loans.

SBI chairman Arundhati Bhattacharya was, however, confident of improved performance as exposure to stressed sectors such as iron and steel, power and textiles constituted 1.77% of the bank’s balance sheet.

With less than year away from March 2017—the deadline Rajan has set to clean up the banks’ books — the wobble was visible in other state-owned banks’ books as well (see table).

Bank of Baroda reported a net loss of Rs.3,230.14 crore for the March quarter. Like PNB, the loss was restricted due to a tax write-back of Rs1,055.06 crore in the quarter.

NPAs, short for loans that have turned bad, have jumped sharply forcing lenders to set aside or “provision” a greater amount to account for these advances that have stopped yielding earnings.

Analysts said a few quarters of pain, even if it comes at the cost of lower profits, is perhaps unavoidable to clean up the books.

“SBI reportedly has a ‘watch list’ at only 1% of outstanding loan and this number brought relief to the markets that potential bad loans are under control,” said Ravi Shenoy ,vice-president, research, Motilal Oswal Securities. In banking parlance, a ‘watch list’ refers to the loan accounts that can potentially turn bad because of an inconsistent repayment record.

But some analysts caution the worst may not be over.

“Smaller and mid-sized banks and even some private banks may still continue to have higher slippages,” said Siddharth Purohit, senior research analyst with Angel Broking. “The PNB chief said that the cleaning up process isn’t over yet. Hence, 2016-17 may not see growth in terms of profitability but the management has set path for 2017-18,” he added.

The silver lining, however, is that the government has laid down a road map to adequately bolster the state-owned banks’ capital base. This should keep the tap on credit for genuine business need flowing into the economy.

“Signs indicate that the economy is gradually recovering. Global uncertainty is also stabilising, oil prices are creeping up. Moreover, the government’s policies are beginning to show an effect. Good rains this year will turn the economy around,” said Saugata Bhattacharya, chief economist, Axis Bank.

Minister of state for finance Jayant Sinha had said on Friday that India will have 8-10 very competitive public sector banks once the consolidation phase of the 27 banks ends.