Devil in the detail

| Updated on January 13, 2018 Published on February 19, 2017

The still large bad loan book not only heightens the risk to earnings but also impedes fresh lending

The rather sanguine reaction of the market following the results of some of the leading public sector banks, is understandable. After the tumultuous performance last fiscal, owing to the RBI’s asset quality review, most banks have cut their losses considerably. Incremental addition to the stockpile of bad loans has slowed, leading to a fall in provisioning requirement and improvement in earnings. The quarterly slippages of the largest lender, State Bank of India, have halved over the last two quarters from a whopping ₹20,000-30,000 crore in the second half of last fiscal. Other large state-owned lenders such as Bank of Baroda and Punjab National Bank, after reporting record losses, have crawled back into the black. But the recovery is nothing more than an optical treat, calming investor nerves rattled over the past couple of quarters by the sheer quantum of slippages. While the pace of slippages has moderated, much of the damage has been done. With PSBs alone saddled with over ₹6 lakh crore of bad loans, provisioning requirement can shoot up in the coming quarters if stressed accounts are not resolved quickly and bad loans continue to age. SBI alone has a little over ₹1 lakh crore of bad loans, nearly a fifth of the country’s fiscal deficit.

With core earnings continuing to shrink on account of tepid credit offtake — further hit by demonetisation — many banks have only just managed to stay above water; in most cases bad loan provisions are equal to or many times banks’ operating profit. And this, despite the steep windfall treasury gains that banks reported during the quarter. The silver lining, until recently, was the strong performance by private banks, which had mostly emerged unscathed from the RBI’s AQR activity. But the sudden rise in slippages of large lenders such as ICICI Bank and Axis Bank, aside from raising some niggling questions, have also weighed on the performance of the entire pack, with profits shrinking for two quarters in a row.

The only way to free up banks’ balance sheet and revive investment appetite of stressed companies is to hasten the resolution process. Asset reconstruction companies (ARCs) set up for this purpose have seen limited success, owing to scarce capital and delays in the functioning of the Debt Recovery Tribunals. Lifting the cap on promoters’ holding in an ARC has been done away with recently, easing up capital raising. There is now an urgent need to kick-start the resolution machinery under the new Bankruptcy Code. Also, in finding ready takers for businesses under the RBI’s various restructuring schemes or selling bad loans to ARCs, lack of concurrence of the serviceable or sustainable portion of debt has impeded resolution. Hence, banks need to be empowered to take huge haircuts to restore viability in some projects. For this, the Centre needs to move ahead on structural reforms — be it operationalising the Banks Board Bureau, or setting out a clear roadmap for consolidation within the sector, or reducing its stake in PSBs.

Published on February 19, 2017
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