Size is no shield against risks

State Bank of India’s results for the latest June quarter reinforce the message that size is no protection against structural risks — low loan growth, deteriorating asset quality and increasing pressure on margins — facing banks today.

Consider loan growth first. Private sector banks, such as HDFC Bank and Axis Bank, despite having a much smaller branch network than SBI, have managed over 25 per cent growth in high-yielding retail loans. SBI, which has the largest network of branches in the country, has seen a more modest growth in its retail business. In fact, much of its incremental growth has been coming from its large- and mid-corporate segment.

In the quarter ended June, the retail loan book grew 16 per cent, and large- and mid-corporate loans by 19 per cent and 21 per cent, respectively.

The focus on industrial lending has led to sustained pressure on asset quality, as the bank continues to lend to stressed sectors, such as infrastructure (23 per cent growth in loans), and iron and steel (33 per cent).

Private banks, in contrast, are hardly present in this segment or are going slow on lending to corporates. SBI, in a bid to reduce delinquencies, changed its focus recently by lending to highly-rated companies. But this leads to lower yields on loans, which affect margins.

SBI’s efforts to consolidate its loan book to reduce asset quality pressures have not had the desired result. The bank’s gross non-performing assets (GNPA) have shot up to 5.6 per cent of loans, higher than those of Punjab National Bank — the public sector bank with the highest NPAs till date.

For PSU banks, apart from bad loans, an additional pressure point is restructured assets — loans that are rescheduled, keeping in mind the financial stress of the borrower.

However, the risks on some of these loans going bad have significantly gone up. Following the recent round of results, overall stressed assets (NPAs plus restructured assets) for public sector banks are close to the 10 per cent mark.

For SBI, a quarter of the restructured loans have already gone bad. Restructured loans account for 3 per cent of SBI’s loan book on top of the 5.6 per cent, which have already turned delinquent.