Media reports say the parliamentary committee on estimates, headed by Murli Manohar Joshi, has invited former Reserve Bank of India (RBI) governor Raghuram Rajan to brief it on the mounting non-performing assets (NPAs) of Indian banks. The invitation follows former chief economic adviser Arvind Subramanian’s praise for Rajan’s role in identifying the problem and taking steps to address it, before the committee. It is seeking Rajan’s views on the “crisis” —how it has been created and how it should be tackled.
The status of public sector banks in India today
Rajan forced the banks to come clean by conducting a first-of-its-kind asset quality review in the second half of fiscal year 2016. Reserve Bank of India (RBI) inspectors checked the books of all banks with a fine-tooth comb, identified the bad loans and asked the banks to clean up their balance sheets in six quarters between December 2015 and March 2017. However, the clean-up process has not yet completed.
Let’s take a look how the 21 public sector banks fared between December 2015 and June 2018. Their share of banking assets is less than 70% but when it comes to bad loans, they contribute about 87%. The gross NPAs of India’s public and private banks was ₹ 10.03 trillion in June 2018.
Data compiled by Ashwin Ramarathinam of Mint shows the PSU banks have recorded close to ₹1.7 trillion in losses between December 2015 and June 2018, more than 80% of ₹ 2.11 trillion capital infusion that the government has announced. This also exceeds the total capital infusion in 31 years between 1986 and 2017, one-third of which—₹ 50,000 crore—flowed in 2016 and 2017. Since December 2015, Indian Overseas Bank (IOB), Central Bank and Uco Bank have posted loss in every quarter. While IOB’s cumulative loss is ₹ 12,997 crore, that of Central Bank is ₹ 10,800 crore and Uco Bank ₹ 10,133 core. Bank of Maharashtra has been in the red for 10 successive quarters, IDBI Bank Ltd and Oriental Bank of Commerce seven quarters, United Bank of India five quarters, Andhra Bank four quarters and State Bank of India (SBI), Syndicate Bank, Allahabad Bank and Punjab & Sind Bank three quarters each.
IDBI Bank has recorded the maximum loss in this period (₹ 20,022 crore) followed by Punjab National Bank (₹ 19,724 crore), SBI (₹ 15,010 crore) and Bank of India (₹ 13,190 crore). In eight of the last 11 quarters, PSU banks as a group posted net losses because of high provisions to take care of their bad assets. Provision and contingencies which were ₹ 42,417 crore in December 2015, rose to ₹ 1.29 trillion in March 2018, before dropping to ₹63,010 in June. Between December 2015 and June 2018, the cumulative provision was ₹ 6.09 trillion.
During this period, many PSU banks such as Allahabad Bank, Andhra Bank, Bank of Maharashtra, Central Bank, IDBI Bank, Syndicate Bank, Uco Bank and United Bank have seen their gross NPAs as a percentage of their loan books growing around two and half times.
For others, barring Indian Bank and Vijaya Bank, gross NPAs have at least doubled. Such loans of Indian Bank and Vijaya Bank (two banks which have not made any loss) have risen around one and a half times in these 11 quarters.
Apart from high provision, the other reason for many PSU banks making losses is stagnancy and even drop in their net interest income. Ditto about fee income. Both have been on the decline for those which have started shrinking their balance sheets.
Between September 2015 and March 2018, six banks have shrunk their deposit portfolios. They are Uco Bank (16%), Corporation Bank (10%), Indian Overseas Bank (7%), Bank of Baroda (3%), BoI and Dena Bank (less than 1% each). Indeed, SBI has grown its deposits by 65% during this period but mergers of its associate banks with itself also contributed to this. Among others, Vijaya Bank, Andhra Bank, Union Bank of India and Indian Bank have grown their deposit books between 20% and 28%.
When it comes to advances, 10 banks have contracted their books and at least two of them—Uco Bank and Indian Overseas Bank—by more than one-fifth of the size of their loan portfolios. Corporation Bank, IDBI Bank and Central Bank’s loan books have contracted by around 16% each and that of Bank of India, Bank of Maharashtra and Dena Bank, between 10.5% and 12.7%. Four PSU banks have recorded marginal growth in their loan portfolios in the past one a half years and seven of them have shown a double-digit growth.
What do all these mean? The public sector banks are losing market share to their private peers. Since they are backed by the sovereign, the depositors are still keeping money with them but many PSU banks are turning into narrow banks—investing in government securities instead of giving loans.
Of course, at least two of them have no choice. They are restrained by RBI from giving fresh loans while nine others are also not allowed to carry on expansion in business.