Banks on a long and winding road to debt recovery

Persisting asset-quality concerns, subdued earnings, no meaningful recovery in loan growth, and structural challenges of capital and governance continued to plague the beleaguered banking sector in 2018. Within the sector, PSBs continued to lag, compared to their private sector peers. While the Nifty Bank Index gained a marginal 5-6 per cent in 2018, in line with the bellwether market indices, the Nifty PSU Bank Index lost an eye-watering 17 per cent, owing to deteriorating operational performance, lingering bad loan woes, and capital constraints.

In the first half of 2018-19, the losses of PSBs widened to a little over ₹30,000 crore from ₹4,500 crore in the corresponding period last year. Gross non-performing assets (GNPAs) for these banks shot up by ₹1.3 lakh crore over the past year (September 2017-September 2018). While private sector banks fared relatively better, earnings declined by 8 per cent Y-o-Y in the half year ended September 2018, and GNPAs continued to rise by more than ₹23,000 crore.

PSB losses

Banks, in particular, PSBs, took a hard knock in the March quarter; PSBs alone reported losses of ₹62,000 crore in the March quarter, and increase in NPAs of around ₹1.2 lakh crore. Overall, at the system level, GNPAs increased by nearly ₹3 lakh crore in FY18 over FY17. In the latest September quarter, while the pace of addition to bad loans has moderated considerably from the March quarter, banks are still not out of the woods.

To start with, going by September quarter numbers, many banks are still in dire need of capital. The large bad loan book (of about ₹10 lakh crore for all banks; around ₹8.7 lakh crore for PSBs) will keep provisioning high in the coming quarters. Also, the RBI’s February diktat requires banks to report even one-day defaults and draw up resolution plans within 180 days, failing which they will have to refer the case for insolvency under the IBC. This has put ₹1.74 lakh crore of stressed power sector accounts in limbo. How this gets resolved needs to be seen.

The slow progress on IBC cases, and the large haircuts that banks need to take, will continue to depress earnings. Of the 1,198 cases under Corporate Insolvency and Resolution Process (CIRP) till date, 118 have been closed on appeal/review, while only 52 have seen approval of resolution plan.

The amount realised by financial creditors in comparison to their claims has also fallen substantially in the September quarter against the June quarter. In the June quarter, while financial creditors realised 56 per cent of their claims for the 12 cases, in the September quarter, they realised a much lower 26 per cent of the claims admitted for the 18 cases.

Also, while credit growth has moved up to 14 per cent levels in recent times, the growth is only in pockets (mainly unsecured retail loans), with modest recovery in corporate lending. Also, loan growth for PSBs (that are over two-third of the overall loans), still remains subdued at 4-5 per cent (in the September quarter).

Deposit growth has slowed down considerably to 8-9 per cent, which is a cause for concern, as it will continue to add pressure on funding and margins.

Banks’ underperformance

The sudden resignation of RBI Governor Urjit Patel and the appointment of Shaktikantha Das have kindled hopes of regulatory leeway on capital requirement and PCA norms for banks. While this may offer interim relief to banks, it may do little to iron out the structural challenges of growth, capital and governance at banks. These need to be resolved if banks have to come out of a sustained period of underperformance.