By Ruma Dubey

RBI’s morose verdict on the banks and their asset quality did not come as a shock; in fact it was very much in line with we already knew – things are sticky in the Indian banking sector and it is only getting worse.

In the 2013-14 Financial Stability Report, an annual feature paints a very gloomy picture for the Indian banking sector. In comparison, its picture about the Indian economy is much rosier and optimistic. But it’s like this – if one limb of the body fails, the entire body gets affected. So when something as vital as the banking sector is showing signs of deep stress, can the Indian economy shrug it off and say that it is no cause for worry? Banking is like the life blood for the economy and if there is a clog there, well, it could be fatal. And that’s how serious and precipitous India’s banking scenario currently looks. This sounds too alarmist for a year-end story but sadly that is indeed how things look.

A run through the highlights of the report, specifically about the banks and NPAs:

• The growth of the Indian banking sector moderated further during 2013-14. Profitability declined on account of higher provisioning on banks’ delinquent loans and lacklustre credit growth
• Asset quality of scheduled commercial banks (SCBs) may worsen from the current level if the macroeconomic conditions deteriorate drastically, and banks are likely to fall short in terms of having sufficient provisions to meet expected losses under adverse macroeconomic risk scenarios.
• Consolidated balance sheet of SCBs in 2013-14 registered a decline in growth in total assets and credit for the fourth consecutive year. Causes - slower economic growth, de-leveraging, persistent pressure on asset quality leading to increased risk aversion among banks and also increasing recourse by corporates to non-bank financing including commercial papers and external commercial borrowings.
• Credit growth on a y-o-y basis continues to decline and recorded low growth at 10% as of September 2014, with public sector banks (PSBs) underperforming the rest with a growth of 7.9%. Growth in deposits also declined to 12.9% v/s 13.7% as of March 2014.
• The gross non-performing advances (GNPAs) of SCBs as a percentage of the total gross advances increased to 4.5% in September 2014 v/s 4.1% in March 2014.
• The net non-performing advances (NNPAs) as a percentage of total net advances also increased to 2.5% in September 2014 v/s 2.2% in March 2014.
• Stressed advances increased to 10.7% of the total advances from 10% between March and September 2014.
• PSBs continued to record the highest level of stressed advances at 12.9% of their total advances in September 2014 followed by private sector banks at 4.4%.
• Share of stressed advances in total advances increased in the case of 46 SCBs (accounting for around 88 per cent of total loan portfolios of SCBs) between March and September 2014.
• Infrastructure, iron and steel, textiles, mining (including coal) and aviation had 52% of total stressed advances of all SCBs as of June 2014, whereas in the case of PSBs it was at 54%.
• Exposure of PSBs to infrastructure stood at 17.5% of their gross advances as of September 2014; much higher than private sector banks at 9.6% and foreign banks at 12.1%.
• PSBs Return on Assets (RoA) fell from 0.8% to 0.5% in 2013-14 (YoY) while Return on Equity (RoE) fell down sharply from 13.24% to 8.47%.
• In case macroeconomic scene improves, asset quality of public sector banks is expected to improve, but they will continue to carry the highest GNPA ratio among the bank groups. And if it gets worse, PSBs may record the lowest CRAR of around 9.2% by March 2016 v/s 11.3% in September 2014), close to the minimum regulatory capital requirement of 9%.
• The stress test results showed that the average net impact of interest rate shocks on sample banks was not very high. However, foreign exchange shock scenarios showed relatively higher impacts on banks.

Yes, there is pain; that’s the clear message we get from this report. What we also decipher is that unless reform process in the country does not take off on a war footing, the banking and the entire economy could falter. But the biggest message – PSBs continue to remain under the diktat of the Govt and with restricted autonomy, crony capitalism, these banks are bleeding to death. Politicians treating these banks like their very own, personal ATM is leaving a telling effect on the health of these banks. And one does not know if this attitude will every change.

Bad loans cannot be blamed entirely on high interest rates and lower economic growth. Banks are to be blamed because when it comes to big companies, they have no verification process of end use of the funds, poor assessment and a meaningless recovery process. Will that ever change?

For detailed insight into the report, go to: http://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=805