Sizing it up

There was a sense of unease when State Bank of India — India’s largest bank — reported its June quarter results, its first after the merger with five associate banks. The stockpile of bad loans for SBI is now a tenth of its loans, which, given the size of the merged entity, is alarming. True, India’s banking system has always been highly fragmented compared to the developed economies, where the top three or four banks account for 70 per cent of the banking activity. But that’s not to say that the Indian financial system is devoid of the threat that loomed for other economies due to large and highly interconnected financial institutions. In line with the broad principles of the Basel Committee, the Reserve Bank of India had designated SBI as one of the two domestic systemically important or ‘too-big-to-fail’ banks — failure could have a cascading impact on the entire financial system and the economy. With the merger, SBI’s systemic importance has only risen. The merged entity’s assets are about a fourth of the country’s GDP and loans are a fourth of the sector’s overall lending activity. Given this, the sharp spike in SBI’s slippages and bad loans, even seven quarters after the RBI’s asset quality review, calls for attention. While poor asset quality of associate banks was expected to drag SBI’s performance, the quantum of slippages of a little over ₹26,000 crore and total bad loans at a whopping ₹1.8 lakh crore for the consolidated entity, is disturbing.

The state of affairs at other public sector banks that lack the bandwidth, size and reach of SBI, is far worse. Alarmingly, many of these banks have bad loans that are a fifth or more of their loan book. Led by two large banks that have relatively higher exposure to stressed sectors, NPAs for private sector banks too have been growing at a worrying pace of 50-100 per cent year-on-year in the last four quarters. For PSBs, after moderating, additions to bad loans jumped 30 per cent in the June quarter. Despite RBI’s countless attempts to clean out banks’ balance sheets, more skeletons appear to be tumbling out every quarter.

However, aside from stress in large corporate accounts, there is another risk looming. Many banks are reporting increasing slippages in their retail portfolio. After abandoning personal loans and credit cards in 2008, banks have been growing their retail portfolio aggressively in recent times. But just as excessive corporate lending has spelt doom, banks run similar risks from their unsecured retail portfolio. Ensuring that back-end processes of underwriting customers are streamlined and risks mitigated through the proper usage of credit bureaus is critical to avoid a repeat of past mistakes. It is worrisome enough that banks have to carry their legacy corporate bad loans for some time. If retail delinquencies gather steam, banks will find it difficult to drag themselves out of the morass of stressed loans, even if the economic cycle turns.

COMMENT NOW