Losses posted by a clutch of state-owned lenders in the three months to March are nudging a staggering Rs 60,000 crore, with just two banks having turned in a profit so far. The high losses have left some banks with capital that is barely sufficient to meet the regulatory norms and consequently little growth capital. This would restrict their lending, especially to high-risk corporate borrowers. Already, banks have realigned their lending strategies to cater to retail clients. Apart from the shortage of capital, another reason for this is the central bank’s move to initiate a prompt corrective action (PCA) plan for 11 state-owned banks; this restricts them from taking an exposure to very high risk-weighted assets. While Dena Bank has been barred from lending altogether, restrictions have been placed on the exposures that Allahabad Bank can take.
The share of PSU banks in bank loans fell to 62.5% at the end of March 2017 from 66% at the end of March 2016; their share of deposits dropped to 65% from 68%. The losses of public sector banks (PSBs) in Q4FY18 have stemmed largely from slippages, or exposures that turned bad during the quarter, for which lenders were required to make provisions. Many of these exposures related to accounts for which lenders had initiated a strategic debt restructuring (SDR) but had failed to implement.
For instance, of the Rs 12,823 crore of slippages at IDBI Bank, an amount of Rs 9,645 crore originated from either SDR or the Scheme for Sustainable Structuring of Stressed Assets. Moreover, banks needed to make provisions for mark-to-market incurred on bonds that have lost value over the last few months; while banks are permitted to amortise the provisions over four quarter, some of them have opted not to avail themselves of this dispensation. It is not clear whether the worst is over because some large exposures to telecom and power companies remain on banks’ watch-lists and could slip in the coming quarters.
In February, the Reserve Bank of India tightened rules for identifying stressed assets wherein a one-day delay in repayments of interest would necessitate to banks to classify the borrower as a defaulter. The central bank had asked lenders either singly or jointly to initiate a resolution plan as soon as a corporate default is spotted. In other words, banks have several options to revive the defaulting company but must exercise these within 180 days the default.
However, State Bank of India (SBI) chairman Rajnish Kumar believes the lender’s performance in FY18 should be seen as its nadir. “Last year was a year of disappointment. Next year will be a year of hope while FY20 you can consider to be a year of happiness,” Kumar said. SBI recorded a quarterly loss of Rs 7,718 crore in Q4FY18 as against a net profit of Rs 2,815 crore a year ago.
Despite mid-sized lenders Indian Bank and Vijaya Bank having reported profits of Rs 132 crore and Rs 207 crore, respectively, aggregate losses for 20 PSBs shot up to Rs 59,054.74 crore in Q4FY18. That’s a near 20-fold increase over the losses posted by them in Q4FY17. In the case of PNB, Kotak Institutional Equities wrote the bank has consumed a lot more capital than was anticipated due to the Nirav Modi fraud. “There would be further impact on tier-1 ratio in the ensuing quarters till the balance sheet is stabilised,” the brokerage noted.
PNB posted a net loss of Rs 13,417 crore in Q4FY18. The value of slippages, or fresh additions to non-performing assets (NPAs), more than doubled year-on-year (y-o-y) to Rs 40,672 crore during the quarter, accounting for around 6.5% of the bank’s loan book. IDBI Bank posted a Rs 5,663-crore loss for the March quarter as provisions for NPAs rose 78% y-o-y to Rs 10,773 crore. However, the bank was profitable on an operating level with pre-provisioning operating profit at Rs 2,361.92 crore, up 126% y-o-y.
MK Jain, MD and CEO, IDBI Bank, said the lender has surpassed its internal targets for profitability in FY18. “With an increase in net interest income and by shedding bulk deposits worth Rs 13,000 crore, we have been able to improve our operating profit and margins,” he said. The bank will focus on increasing its retail assets and liabilities while reducing its corporate exposure in order to drive profitability.
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