Additions to bad loans slowed in Q2 but worst not over yet, say analysts

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Mumbai: Addition to banking sector’s bad loans slowed in the second quarter on a sequential basis but analysts fear that the industry is still not at the bottom of the problem.

Thirty-eight listed banks that reported September quarter earnings posted a 1.32% rise in aggregate gross bad loans to Rs8.40 trillion from a quarter earlier, data compiled by Mint shows. The increase is 18.98% when compared with the same quarter a year ago. Of this, Rs7.34 trillion belongs to public sector banks.

The jump in bad loans has been higher in case of private banks as compared to state-owned lenders. Among private lenders, Axis Bank and Yes Bank reported a rise in bad loans because Reserve Bank of India’s (RBI) risk-based supervision pointed out divergence in reporting of bad loans.

For Axis Bank, the divergence in gross bad loans, the difference between central bank’s assessment and that reported by the lender, stood at around Rs5,630 crore at end March 2017. The bank recognised such divergence and reclassified nine accounts with outstanding balance of Rs4,867 crore as non-performing in the fiscal second quarter.

The RBI’s assessment of Yes Bank’s gross bad loans was Rs6,355.20 crore more than what the lender had reported at the end of March. However, only Rs1,219.4 crore were classified as non-performing assets (NPAs) because it either received payments or upgraded other accounts.

ICICI Bank and State Bank of India are awaiting RBI’s inspection report.

“As the RBI completes its supervision, there could be some nasty surprises in third quarter results in terms of higher slippages. This, in turn, will lead to higher credit cost and keep pressure on profitability,” said a banking analyst with a Mumbai-based broking house.

According to Udit Kariwala, senior analyst at India Ratings, in the previous inspection by the RBI, divergence in case of PSU banks was less compared to private sector banks.

“But that does not mean there is no unrecognised stress left on balance sheets because a large book of restructured loans, especially from infrastructure and power sectors, could slip into NPA. Some slippages could emanate from most of the SDR (strategic debt restructuring) cases, where banks have not been able to find buyers in the 18-month period and now would be forced to recognise it as NPA. For the sector as whole, fresh slippages could have peaked but this surely is not the bottom,” he said.

Analysts said the resolution of assets, especially of those under insolvency proceedings at the National Company Law Tribunal, will decide how much haircut banks will take, how much of dues they will sacrifice and their provisioning requirement.

Apart from expected pressure on bottomline because of higher provisioning, rise in bond yields could further weigh, especially on the balance sheets of public sector banks.

So far, amid lower credit growth, profitability of most PSU banks was supported by higher other income, which was aided by treasury gains. These lenders had deployed their excess deposits in government securities.

As bond yield rise, price falls, and force banks to make mark-to-market provisions if the value of the holding falls below the market price.

In the second quarter, 11 of the 21 public sector banks reported a cumulative loss of Rs8,047 crore.

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