Worsening asset quality

Last Updated: Sun, Nov 11, 2012 19:41 hrs

There appears to be a clear deterioration in the performance of State Bank of India (SBI) in the second quarter of the current financial year. It cannot entirely be explained by the slowdown in the economy. The bank had expected to gain from an improvement in sentiment as a result of a pickup in the monsoon, but that has not happened. In fact, as the largest bank, it seems to have set the tone for other large public sector banks, which together account for a major chunk of the banking sector and have all performed poorly. This is in sharp contrast to the performance of some of the new private sector banks. Although the latter do not have to carry the same type of priority sector lending burden, they do have substantial exposure to both large and small companies, many of which are stressed. The private sector banks seem to be handling the downside of the current economic slowdown considerably better. This is in stark contrast to the scene immediately after the ripples of the global financial crisis hit Indian shores. At that time, public sector banks fared better, unburdened as they were by the hype that had engulfed the financial sector across the world.

In this last reported quarter, SBI has clocked a deterioration in asset quality, compared to not just the corresponding quarter of the previous year but also the previous year — indicated by a rise in the ratio of gross non-performing assets (NPAs) to 5.15 per cent, one of the highest in the industry. Even so, there is a sharp decline in the level of provisioning, which is lower than not just the corresponding quarter of the earlier year but also the previous one. This has allowed the bank to record a sharp 30 per cent rise in net profit year-on-year, which has naturally failed to carry conviction with analysts and investors. The pattern visible in the numbers of SBI is also evident in those of other large public sector banks like Punjab National Bank (PNB), Bank of Baroda (BOB) and Canara Bank. However, while PNB and BOB have both raised provisioning, Canara Bank, like SBI, has lowered it. Against this, HDFC Bank, a leader among new private sector banks, has maintained its trend in return on assets, notched up a lower ratio of gross NPAs and consequently been able to make lower provisioning. Axis Bank has maintained its return on assets and lowered its gross NPA ratio. But it has chosen to raise provisioning.

In view of this, it is necessary to raise the issue of employee productivity and morale as also the quality of leadership in public sector banks. The quarter was marked by a two-day strike by bank employees to protest against a range of contemplated reform measures. Simultaneously, the financial services department of the Union finance ministry, which represents the interests of the promoter, has been overly active. Is the government trying to micro-manage, thereby making things worse in the process?  

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