By now, all of India's banks have published their unaudited but limited review financial results for the quarter/half-year ending September 30. They clearly indicate that all is not quite sanguine with the banking industry, particularly for public-sector banks (PSBs).
The Reserve Bank of India has mandated that, as a measure of prudence, all banks shall maintain a minimum of 70 per cent provision cover vis-a-vis gross non-performing assets, so that the balance sheet remains healthy even when there is an adverse environment. Barring a handful of banks, most maintained the provision cover ratio (PCR) above the threshold limit in 2010. However, maintaining the level became difficult for some of them, which kept seeking further time from the RBI to fulfil the requirement. For the past year or a little more, banks have been experiencing severe stress on their asset quality and slippages are rising alarmingly, ever since the RBI mandated that banks should transparently declare their level of non-performing assets (NPAs). As a result NPA levels, both gross and net, are rising - and the profits generated are not quite adequate to provide PCR as per the RBI's mandate.
As on March 2012, eight out of 25 PSBs maintained a PCR at above the 70 per cent level; for another 11 banks, it was between 60 per cent and 70 per cent. However, the number has shrunk to five and seven respectively as on September 2012. The data for six other banks, most of them being from the SBI Group, is not available even in their respective websites, and therefore their position is not clear.
More, only three banks' net NPAs are below one per cent. All these banks have better security cover as well as a high percentage of PCR. Another particularly noticeable case is that of the Bank of Baroda. Although its gross as well as net NPAs have risen significantly, PCR is at a comfortable level above 75 per cent - and the bank has boldly shown lower net profits (less than 50 per cent of the March 2012 net profits). In the case of Dena Bank and Indian Bank, whose PCR is also higher than 70 per cent, their respective gross and net NPAs have gone up - but the corresponding provisions seem to be a tad lower. Had they, too, made a slightly higher provision, their PCR level may have gone marginally below 70 per cent. Syndicate Bank has exhibited a different and interesting trend. With the highest provision coverage ratio, 82 per cent among PSBs, it has made more than adequate provision. Its gross and net NPA levels are flat - and it still has managed to show substantial net profits for the half year.
A few banks, on the other hand, have declared higher net profits despite substantial rise in gross as well as net NPAs - by not providing adequately, so as to show higher PCR. This is clearly visible in the case of the State Bank of India, the Union Bank of India, Andhra Bank and the Central Bank of India . All these four banks could have improved the PCR rather than showing higher net profits. At the same time, banks like Allahabad Bank, Canara Bank, Bank of India and Punjab National Bank, with significantly higher gross and net NPAs, have made large provisions and shown lower net profits - although that has still not helped them in improving their PCR ratio (the PCR of Canara Bank for September 2012 is not available in the public domain). Central Bank of India is the laggard among those declaring - its PCR is at a dismal low of around 40 per cent.
PSBs are indeed facing asset quality stress. With tough Basel-III requirements ahead, it would be a herculean task for most of them to emerge unscathed from this precarious period. They will have to strengthen their monitoring and recovery mechanism and arrest the cascading slippages, while using all the tools at their command to upgrade restructured and other big-ticket accounts. They should also create a robust risk management architecture, so that new loans are assessed with deeper scrutiny.
The RBI has repeatedly advised banks to strengthen their credit monitoring mechanisms. All the PSBs have thus put in place dedicated credit monitoring departments at the corporate as well as at the secondary and tertiary levels to monitor accounts at an early stage of showing stressed signals. Regardless of these efforts, cash recoveries together with upgradation to standard category have been overshadowed by a higher level of slippages. In the case of the top five to ten banks, the sharp rise in NPA levels is on account of a few big-ticket advances and because some restructured accounts have not turned at the pace anticipated.
Adding to banks' woes, the new kids on the block, as it were, are education loan borrowers who are defaulting in large numbers. This is due to a large number of engineering graduates not finding suitable jobs, coupled with the stagnation in IT industry due to the global slowdown.
The next few quarters will be equally turbulent for PSBs. Maintaining profitability and containing NPA levels will be severely challenging. It will not be easy to increase provisioning ratios to 70 per cent-plus levels without hitting profits. While ideally the banks should evaluate their financial position and go for consolidation, they will also be pushed to provide adequate credit to productive sectors. How they can simultaneously balance their credit growth, arrest further slippage, make substantial recoveries and improve PCR levels only time will show.