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The April-June quarter numbers of Chennai-based Indian Overseas Bank (IoB) clearly shows the extent of mess some of the state-run banks find themselves in on the asset-quality front. The gross non-performing assets (NPAs) of the bank grew to 9.4 percent of its total loans in the June quarter, compared with 8.33 percent in the preceding quarter and 5.34 per cent in the year-ago quarter.

In absolute terms, the gross NPAs of the bank shot up to Rs 16,451 crore from Rs 10,351 crore in the year-ago quarter, in dark reminder of the crisis that crippled Kolkata-based United Bank of India a while back. There the gross NPA levels had risen to double digits, prompting the Reserve Bank of India (RBI) to impose lending restrictions.

Shares of IoB tanked nearly 8 percent intraday on Monday following the dismal numbers. At 9.4 percent, the bank’s gross NPA level is one of the highest in the banking industry. High bad loans necessitated higher provisions (provisions rose to Rs 663 crore in the June quarter from Rs 299 crore a year ago) eating into the profitability. Net profit of the bank fell sharply by almost 95 percent in the June quarter.

Another leading lender, Union Bank of India, too reported higher gross NPAs at 5.53 percent from 4.96 percent on a quarter on quarter basis. Punjab National Bank, meanwhile, witnessed a marginal decline in the figure to 6.47 percent from 6.55 percent a quarter ago.

As Firstpost said in a recent piece, state-run banks are likely to post weak numbers in the June quarter too, since there haven’t been any major changes in the situation on the ground to improve the health of loan book of these lenders, which have high exposure to high-risk sectors such as infrastructure and agriculture.

Persisting stress on corporate balance sheets continue to reflect on the bank’s business too. Private banks have smartly managed to escape unhurt since these lenders have stayed away from high-risk loans to safer retail loans. Bad loans on the books of state-run banks, currently being reported, are a result of reckless lending and poor credit assessment of many years. It will take long time to repair these loans since revival in economic recovery is key. But, government’s lack of enthusiasm in addressing the capital scarcity of state-run banks can worsen the
situation further. Timely infusion of additional capital would have aided state-run banks to make provisions and show better profitability.

The government has been prodding state-run banks to not depend upon it for capital and tap the market instead. But it is forgetting that with their weak balance sheets, these banks wouldn’t be able to attract private capital. The weaker these banks become, lesser will be their ability to fend for themselves.

This is something finance minister Arun Jaitley should take note of.

After budgeting a paltry Rs 8,000 crore in the Union Budget, Jaitley was forced to rethink on his plan after the RBI took up the issue of bank capitalisation with the government. But, so far there hasn’t been any action on the recapitalisation.

Global rating agencies have been warning about the weak capital position of banks as a major area concern in the Indian economy.

Currently, over 90 percent of the bad loans in the banking system (about Rs 3 lakh crore) is on the books of state-run banks. On the other hand, private banks continue to do well and their bad loans are well within the limits.

HDFC Bank, the first large private bank announcing the results, came up with a good earnings card. Profit numbers have been healthy and the asset quality is stable even though there is slight increase in stress on a sequential basis. Net profit came at Rs 2,695 crore in the first quarter compared with Rs 2,233 crore in the year-ago quarter.

Gross non performing assets (NPAs) as a percentage of total loans stood at 0.95 percent in the June quarter, slightly higher than 0.93 percent in the preceding quarter, but lower than 1.07 percent in the year-ago quarter.

Axis Bank, another large private lender, too has reported a relatively lower Gross NPA level at 1.38 per cent. The question Jaitley should ask himself is if one set of banks has got the formula of profitability right, why can’t the others that operate in the same industry environment too?

The key differentiating factor, as Firstpost has noted several times before, has been the freedom to take business decision and operate without external intervention (read political and business interests) — something absent in state-run banks even to date. Pubic banks are endlessly under pressure from government to direct lending to certain sectors.

Capitalisation of state-run banks would be too big of a problem for the government to handle in the coming years, if not addressed now.

Besides making weak state-run banks weaker, this would also act as a hurdle in the way of a speedy economic recovery.

Bad loan provisioning is one among the many areas for banks where capital is essential. Even with the proposed additional capital infusion of about Rs 11,200 crore (above the budgeted Rs 8,000 crore), the government would not be able to sufficiently capitalize government banks since they need capital also to meet Basel-III norms and fund credit expansion besides making provisions on stressed assets.

The survival of state-run banks in the long-term is inevitably linked to the government’s willingness to cut stake in public banks and letting these banks raise capital. But, this government doesn’t seem to be inclined to bring in such radical reforms.