Turnaround signs

After springing nasty surprises on investors for the last three years, beleaguered corporate banks in India have offered glimmers of hope with their financial performance for the December quarter of FY19. Private banks such as ICICI Bank and Axis Bank, which had registered a material spike in their non-performing assets (NPAs) after RBI tightened the screws on stressed asset recognition in 2015-16, have seen a strong uptick in core income growth this quarter, even as their NPA additions have slowed. Leading public sector banks have turned around too, with PNB back in the black after three quarters of losses and SBI reporting profits compared to losses a year ago.

Three trends underlying recent numbers suggest that the worst may be over for corporate banks in this credit cycle. One, with aggressive RBI actions forcing them to expedite the recognition of doubtful loans, the gap between so-called restructured loans and their reported gross NPAs have sharply narrowed. In March 2015, the restructured advances, at 6.5 per cent of aggregate loan books, were far higher than reported GNPAs of 4.6 per cent. But the RBI’s latest Financial Stability Report pegged restructured advances at 0.5 per cent by September 2018 and the GNPA ratio at 10.8 per cent. This suggests that the bulk of legacy NPAs are now out in the open. Two, banks have reported a sharp fall in fresh slippages. Despite PNB providing for the Brady House fraud and SBI for the IL&FS default, provisions shrank for both banks, lifting their profits. Three, improving system credit growth at 12.8 per cent by December, played a big role in pulling banks out of the NPA quagmire, shoring up their interest income and expanding the denominator for their NPA ratios. But while investors can expect banks to build on their recent turnaround through FY20, they should brace for a bumpy road to recovery. While banks have made brisk progress in admitting corporate insolvency cases to the NCLT, recoveries have been quite slow in coming. One-off cases of troubled corporate borrowers such as the ADAG group who have so far slipped the NCLT net, will likely to crop up too.

Given how long it has taken for domestic banks to regain some credibility on their reported numbers, it is important for the RBI not to give in to their pleas for further regulatory forbearance on large corporate loans at this juncture. The government on its part needs to hold its horses on pressuring banks to double down on agriculture, infrastructure or Mudra loans, to rev up the economy. It was after all directed lending to political cronies, poor governance and lackadaisical credit assessment that led banks into this protracted NPA mess. So, unless and until domestic banks manage to tone up their risk controls, governance systems and recovery mechanisms to deal with rogue borrowers, it is best that they operate within their limited circle of competence, even if results in credit constraints to the economy.