Most Public Sector Banks (PSBs) were in bad shape on account of a high level of Non-Performing Assets (NPA), huge losses reported, and slower growth in credit/deposits resulted in heavy fall in the share price/market capitalisation of PSB stocks. The RBI’s “Report on Trend and Progress of Banking in India” of December 24, 2019, reveals interesting positive trends in performance of Scheduled Commercial Banks (SCBs), especially PSBs. One can infer the turnaround of PSBs in the years to come.
The principal reason for the poor performance of banks is the financial implication associated with NPAs. The bad debts adversely affect profitability as provisions are to be made depending upon the ageing of these assets and security value, further interest cannot be charged and unrealised interest is to be reversed.
The asset quality of SCBs improved in terms of Gross NPA (GNPA) Ratio and Net NPA Ratio. The GNPA ratio of SCBs declined in 2018-19 after rising for seven consecutive years as recognition of bad loans neared completion. The SCBs’ GNPA (amount in lakh crores and as a per cent of gross advances) in March 2018 of Rs 10.39 (11.2%) declined to Rs 9.36 in March 2019 (9.1%) and remained stable at 9.1% in September 2019.
The reduction in PSBs was sharper from Rs 8.96 (14.6%) to Rs 7.40 (11.6%) as against increase in PVBs (private banks) from Rs 1.29 (4.7%) to Rs 1.84 (5.3%). A decline in the slippage ratio, as well as a reduction in outstanding GNPAs, helped improve GNPA ratio.
The Provision Coverage Ratio (PCR) improved to 61% (September 2019). The restructured standard advances to gross advances ratio began declining from 2015 and reached 0.55% (March 2019) indicating the lesser potential of large NPAs.
Recovery of stressed assets improved during 2018-19 propelled by resolutions under the Insolvency and Bankruptcy Code (IBC), which contributed more than half of the amount. Many more accounts are in pipeline under IBC resolutions and banks can improve recoveries of NPAs. Larger loans (Rs 5 crore or more), constituting 53% of gross credit, contributed 82% GNPAs (March 2019) broadly indicating the potential for recovery through IBC.
After years of deterioration in financial performance, turnaround started in 2018-19. The operating profits of SCBs improved from Rs 2.93 lakh crore to Rs 3.05 lakh crore and net loss reduced from Rs 0.32 lakh crore to Rs 0.23 lakh crore.
The overhang of stressed assets declined, fresh slippages were arrested, and in provisioning requirements, bottom lines improved modestly. The banking sector returned to profitability after a gap of two years in the first half of 2019-20 and PSBs reported positive net profits after three years.
Differentials in performance of PSBs and PVBs were evident in profitability ratios. For PVBs, both Return on Assets (RoA) and Return on Equity (RoE) worsened in 2018-19 from the previous year, although they were better than those of PSBs. Foreign banks are doing better.
The RoA for SCBs improved from –0.15% to -0.09% in 2018-19 and RoE from –2.81% to -1.85%. Spread (Return on Funds – Cost of Funds) of SCBs improved from 2.8% to 3.1% and that of PSBs from 2.5% to 2.8% while PVBs remained unchanged at 3.6%. The Net Interest Margin (Net Interest Income as a percentage of average assets) increased from 2.5% (17-18) to 2.7% (18-19). Around 44.4 % of SCB deposits are maturing within one year as against 29.2% of advances providing pricing benefit to banks in falling interest scenario.
In 2018-19, the consolidated balance sheet of SCBs expanded at an accelerated pace for the first time since 2010-11, buoyed by a pick-up in deposits and loans led by PVBs. The revival in the growth of loans began in 2017-18.
The recognition of NPAs nearing completion, recapitalisation of PSBs (Rs 90,000 crore in 2017-18 and Rs 1,06,000 crore in 2018- 19) and ongoing resolution process under IBC helped in improving the credit environment. The year-on-year growth in deposits of SCBs was 9.3% and that of credit at 11% – the growth in PSBs were lower. The PVBs led the credit expansion in 2018-19.
However, as in October 2019, the y-o-y credit growth came down to 8.9% and deposit growth has gone up to 10.3%. Even with the muted credit growth, personal loans (housing, consumer durables, credit card outstanding, vehicle loans, education etc) has gone up by 17.2% – credit card outstanding up by 25.9%.
Credit growth in the industry was only 3.4% and export credit was negative by 28.7%. When the economy revives, demand for credit from productive sectors will jump resulting in acceleration of bank credit.
The banking sector is slowly turning around on the back of improvement in asset quality, strengthening capital base, and a return to profitability indicating positive triggers for profitable growth in the years to come. The positive trends indicate that the profitability of SCBs, especially among PSBs, is likely to improve in the coming years.
(The writer teaches banking at ICICI Manipal Academy, Bengaluru)