State Bank of India Is Paying For Not Being Tough On Bad Loans

While banks heave a sigh of relief due to easing of economy, worst is far from over due to the non-performing assets.

What Ails the Banks?

• SBI, country’s largest public sector lender continues to be under strain with a GNPA of 4.29 per cent in June 2015
• Arundhati Bhattacharya, Chairperson of SBI said that there is an easing of stress in the economy
• Since the bank did not lend to corporates revenue, that explains why interest income grew by only 3.6 per cent

State Bank of India’s (SBI) results show everything that is wrong with Indian public sector banks. A slowing economy during the UPA II era resulted in companies defaulting on their loan payments to banks. Since then banks especially government owned have been facing the problem of deteriorating assets. The problem has become so big that weak assets are expected to surpass Rs 5 lakh crore by March 2016, which will be nearly six per cent of the banking assets.

Sitting On Toxic Assets

SBI, the country’s largest public sector lender continues to be under strain with a gross non-performing asset (GNPA) of 4.29 per cent in June 2015 as compared to 4.25 per cent in March 2015. This came as a surprise to the market which was expecting the bank to show a better performance during this quarter.

Quality of assets continues to deteriorate for most of the public sector banks that have declared their June quarter numbers. Around 40 per cent of the stressed assets in the banking sector are contributed by companies in the infrastructure, mining, power and iron and steel sector. Almost all banks have a similar bad loan profile.

Further, around 70 per cent of the bad loans are mainly in the small and mid-sized corporate. In its analysts meet, the SBI’s management said that the expected stability in mid-sized corporate loans will take another 2-3 quarters.

As for the bad loans SBI’s management along with most of the other PSU bank heads feel that the worst is behind us. Arundhati Bhattacharya, Chairperson of SBI said that there is an easing of stress in the economy. Analysts too are expecting NPAs to peak in a quarter or two.

Bankers Become Hoarders

But there is another issue which is highlighted in SBI’s results and for which bankers have only themselves to blame. Due to a slowing economy banks held on to their money and refused to fund corporates. They preferred to stay invested in the safety of government bonds rather than lend to corporate India.

SBI’s domestic loan growth in the June 2015 quarter reflects this point. Credit growth stood at a measly 5.4 per cent which has been the lowest in many years. Because the bank did not lend to corporates its revenue, which is why interest income grew by only 3.6 per cent, the lowest in the last two years.

Apprehension by banks to lend was one of the reasons that the central bank, Reserve Bank of India decided to push for a parallel bond market. Good quality corporates have already moved to the bond market leaving the mid, small and the not-so-good-quality corporates to stay behind with the cautious Indian banks.

Breaking Corporate India’s Backbone

Since small and mid-sized corporates account for a major chunk of toxic assets, SBI is not willing to lend more in this segment. Lending to medium corporates has fallen by seven per cent during the quarter while it grew by only one per cent for small enterprises. Other banks also have similar apprehensions in lending to SMEs.

That being the case, the entire ‘Make in India’ story will be in jeopardy, since small and medium enterprise is the backbone of manufacturing. Public sector banks are now following the private sector model of increasing their focus to personal loans rather than corporate loans. Profits are higher in personal loans as rate of interest is higher as compared to corporate.

Showing Them The Money

The only way banks will be incentivised to lend to corporates is if they see a good amount of inflow of funds. With excess funds their risk taking ability will increase. Realising this, government has decided to infuse Rs 70,000 crore in public sector banks over the next four years. Banks are also being encouraged to raise money from other sources.

One way of making a line look smaller is by drawing a bigger line in front of it. Similarly one way of making non-performing assets (in percentage) look smaller is by increasing the asset base.

The central bank has on various occasions pointed out its displeasure on banks deliberately slowing down its lending business. In fact, banks are so scared of lending and want to accumulate their profit that they have not reduced interest rates to the extent which the central bank has done. Lower interest rates would have meant more companies lining up for money, which the banks do not want to give.

Brighter Days Ahead

Going forward, banks are also expected to see a sharp reduction in their bad loans. Government’s efforts in infrastructure, mining and power sectors is expected to revive a substantial amount of bad loans given by the banks. With the economy picking up steam, banks will have to increase lending.

Sooner or later banks will fall in line and start lending. If their toxic assets come under control they would have little excuse not to lend.

Banks are known to be fair weather friends. With the dark clouds of toxic assets clearing as growth picks up, bankers will be coming out with their umbrellas, just when we do not need one.

(The writer is a Mumbai-based market analyst)