The fourth quarter results of public sector banks, taken as a group, make for dismal reading.
The common thread in most of them, so far, has been a decline in profits and an increase in non-performing assets (NPAs) — attributed to money stuck in infrastructure projects, some agricultural loans hit by unseasonal rains and the impact of higher provisioning for wages following the recent wage accord in the banking industry.
This time there was also no distinction in performance based on size of banks. Large banks such as Bank of Baroda and Punjab National Bank were also among those which reported sharp drop in profits in the fourth quarter.
To an extent, the performance of the banking sector in this quarter mirrors the lacklustre performance in the corporate sector and the broader economy. That by itself is not unusual as this has happened in the past too.
But, banks usually had the cushion of treasury gains that would help them when the corporate sector was not doing too well.
This time the treasury gains were perhaps not sufficient to compensate for the lack of interest income or higher provisions.
NPA ratios of various banks showed a sharp increase over the year. The country’s second largest public sector bank, PNB, saw its NPA ratio rise to 4.06 per cent of assets from 2.85 per cent. Indian Overseas Bank fared worse with its NPA ratio rising from 3.2 per cent to 5.68 per cent. Others including UCO Bank, Union Bank and Indian Bank saw varying degrees of increase in NPAs.
The volume of NPAs in the banking system is expected to touch ₹4 lakh crore this fiscal.
RBI Governor Raghuram Rajan expressed concern last week at the level of NPAs and its effect on bank functioning. He was quick to point out that improvement can come about only with economic growth as well as actions taken by banks to reduce their bad loans.
Some bankers have pointed to higher cash recoveries of stressed assets and lower additions of NPAs as a sign of improvement in the economy. The problems are, however, not going to disappear so soon.
Bankers also seem to be waiting for credit growth to pick up and minimise the NPA problem.
Most of them said at their results press conferences that they expect a 15 per cent growth in credit this fiscal. That is a safe projection at the beginning of the fiscal. Besides, the rule of thumb is that bank credit will normally grow two to two-and-half times faster than the economy.
So, if the economy is expected to clock 7.5 per cent this fiscal, one should expect anything between 15 per cent and 18 per cent growth in bank credit.
But it is unclear at this point about who they will actually lend to. After all, the sectors that need credit, such as infrastructure, steel, real estate, and textiles, among others, are all populated by companies that are already stretched in terms of their debt-equity ratios. How will they be able to borrow more? And without that, how will credit growth increase by 4-5 percentage points more than last year?
Bankers’ stance Ask bankers how they are going to tackle the problem and all of them mouth the same solution – a greater focus on lending to retail customers and small and medium enterprises. That is, of course, the template answer when the corporate loan book is weak. They said the same thing last year too. The world lives on hope.