Bank Earnings: Bad Loans Rise Again But There Is A Silver Lining

Gross NPAs rose in the first quarter of FY20 but net NPAs continued to fall.

Pedestrians walk past a Punjab National Bank (PNB) branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Pedestrians walk past a Punjab National Bank (PNB) branch in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Bad loans across India’s lenders saw an uptick in the April-June 2019 period, reversing a four-quarter declining trend. While fresh slippages—this time from sectors like non-bank lenders—picked up, banks continued to provision aggressively against bad loans leading to stronger balance sheets.

Gross NPAs Rise Again...

Gross non-performing assets across the country’s listed banks rose 3.4 percent over the previous quarter to Rs 9.30 lakh crore at the end of June 2019, shows data compiled by BloombergQuint.

Gross bad loans had peaked at Rs 10.23 lakh crore in the fourth quarter of 2017-18.

State-run banks saw a 3.3 percent increase in bad loans in the first quarter of financial year 2019-20 over the previous quarter. The increase across private banks was marginally higher at 4 percent.

The data includes 37 listed banks, including 22 public sector banks and 15 private banks.

As a percentage of advances, IDBI Bank Ltd. has the highest gross NPA ratio at 29.12 percent, followed by UCO Bank at 24.9 percent, Indian Overseas Bank at 22.5 percent and Central Bank of India at 19.93 percent.

HDFC Bank Ltd. had the lowest gross NPA ratio of 1.4 percent, followed by DCB Bank Ltd. which had gross bad loans of 1.96 percent.

Banks See Another Jump In Bad Loan Additions In Q1 As New Stress Emerges

But Net NPAs Still Falling...

While gross bad loans rose, bank balance sheets looked stronger at the end of the June quarter as provisions against bad loans increased. As a result, net NPAs across the listed banks continued to decline.

Net NPAs for all banks stood at Rs 3.43 lakh crore as of June 30, 2019, compared to Rs 4.18 lakh crore in quarter ended March 31, 2019. A year ago, at the end of the first quarter of FY19, net NPAs were at Rs 4.57 lakh crore.

Indian Overseas Bank reported the highest net NPA ratio at 11 percent in the first quarter of FY20, followed by UCO Bank at 9 percent and Lakshmi Vilas Bank Ltd. at 8.3 percent. IDBI Bank Ltd. has seen its net NPA ratio fall 8.02 percent compared to 10.11 percent in the fourth quarter of FY19 and 18.76 percent in the first quarter of FY19—reflecting the increase in provisions.

HDFC Bank had the lowest net NPA ratio at 0.43 percent at the end of the quarter followed by 0.73 percent for Kotak Mahindra Bank.

Growth Capital Remains Limited

However, the flip side of capital being used for provisioning is that availability of capital to fund credit growth remains limited.

Much of the Rs 2.5 lakh crore infused by the government into public sector banks has been used up to meet regulatory requirements. As such, credit growth continues to be driven by private lenders.

For all 37 banks, gross loans advances rose 12.6 percent to Rs 93.9 lakh crore at the end of June 2019, compared to Rs 84 lakh crore a year ago. Private banks saw a 14 percent growth in the loan book, while PSU banks lagged behind with 8 percent growth.

To be sure, some of the larger PSU banks saw stronger growth. Oriental Bank of Commerce saw its loan book grow 16.4 percent and Canara Bank reported growth of 16.3 percent. The country’s largest lender State Bank of India saw loan growth of 12.5 percent.