RBI’s Big Stick Policy Paying Off: Public Sector Banks On Recovery Mode

With Bank of India (BOI) announcing its operational results for the first half (April – September 2018), and the banking behemoth, State Bank of India (SBI), having done so earlier in the month, the emerging trends of performance of Public Sector Banks (PSBs) can be well gauged. More so, as results of top five PSBs with two-thirds of market share of the sector – including Bank of Baroda (BOB), Punjab National Banks (PNB) and Canara Bank (CB) have shown improvement in their performance.

Though 11 out of 21 PSBs are under prompt corrective action (PCA) of the Reserve Bank of India (RBI), their performance so far shows marginal improvement. It is expected that four PSBs may emerge from the regulatory radar of the PCA. Even banks not under the PCA are also equally focused on recovery of loans using early alert system under special mention account (SMA) concept. It has put immense pressure on borrowers to preempt any likely default. Having worked hard on resolution of non-performing assets (NPAs) in the last few years, the fresh asset quality slippage is now tapering.

The ecosystem surrounding the asset quality is set to improve. The borrowers have begun to realise the impact of Insolvency and Bankruptcy Code (IBC) – 2016. In the fear of losing ownership of units, borrowers are taking precautionary steps to avoid default in repayment of bank loans. The proposed setting up of Public Credit Registry (PCR) by RBI will further add to the scope of creating wider credit history of existing and prospective borrowers. Closer monitoring of PSBs under PCA has created better sensitisation towards increasing overall operational efficiency.

As a result of such improved loan recovery climate and faster recycling of funds, lending appetite is also on an upward curve. Many PSBs have clocked over 11 per cent year on year (YOY) credit growth against corresponding industry growth of 14.4 per cent compared to 7.2 per cent credit growth recorded in previous year.

Thus, many PSBs are gradually recovering from asset quality depression and limping back to normalcy to resume credit flow that can support growth. Learning from the experience of lending profligacy in the phase immediately following the financial crisis (2008-14), banks have now become more sensitive to credit risk. Moderating large exposures and better care in credit origination are the common strategies in the long-term interest of controlling NPAs. The data on Q2 of FY19 on asset quality and profitability can provide further insight on how PSBs are coping with recent challenges and how related performance indicators are progressively changing.

Asset Quality

Gross NPAs (GNPAs) of SBI is down to 9.95 pe rcent from 10.69 per cent recorded in September 2017. The net NPAs (NNPAs) are at 4.84 per cent down from 5.29 per cent. SBI could peg provision coverage ratio (PCR) at 53.95 per cent, up from 47.40 per cent.

Among next rung of big PSBs, Bank of Baroda (BOB) brought down GNPAs from 12.26 per cent to 11.78 per cent and NNPAs from 5.49 per cent to 4.86 per cent in Q2 compared to March 2018. The PCR is up from 61.79 per cent to 70.75 per cent. Corresponding data of Canara Bank (CB) is down from 11.84 per cent to 10.56 per cent and from 7.48 to 6.54 per cent. Its PCR is up from 54.75 per cent to 61.39 per cent. Despite the turmoil, PNB could also bring them down from 18.38 per cent to 17.16 per cent and from 8.9 per cent to 11.24 per cent respectively. It improved PCR from 59.23 per cent to 66.92 per cent.

Among PSBs working under PCA mode, Bank of India (BOI) could reduce GNPAs to 16.36 per cent down from 16.66 per cent during the September 2018 compared to March 2018. NNPA to 7.64 per cent down from 8.26 while its PCR is increased to 69.12 per cent up from 65.85 per cent in March 2018. Oriental Bank of Commerce (OBC) could bring down GNPAs marginally to 17.24 per cent from 17.63 per cent and NNPAs to 10.07 per cent from 10.48 per cent. Its PCR improved from 64.59 per cent to 65.31 per cent. The GNPAs of Bank of Maharashtra (BOM) have improved a tad lower to 18.54 per cent in Q2 of FY 19 from 18.64 per cent in Q2 in FY18 and NNPAs are down to 10.61 per cent from 12.68 per cent. Its PCR increased to 64.37 per cent, up from 49.69 per cent, as substantial improvement.

Profitability

Besides improvement in asset quality, uptick in profitability signifies revival of PSBs. SBI posted a profit of Rs 944.87 crore in September 2018 as against a loss of Rs 4,876 crore in March 2018. Its net interest margin (NIM) is up from 2.67 per cent to 2.76 per cent. Its return on assets (ROA) increased from negative to 0.11 per cent. Among other PSBs, except PNB, many others have posted profits. The NIM of BOB improved from 2.34 per cent to 2.61 per cent since September 2017. Its ROA is increased to 0.23 per cent, up from 0.07 per cent. Similarly, the NIM of Canara Bank is up from 2.53 per cent to 2.74 per cent and ROA from 0.20 per cent to 0.09 per cent during the corresponding period. Profitability indicator is also better in some PSBs operating under PCA. The NIM of BOI increased to 2.27 per cent, up from 1.65 per cent in March 2018. OBC is up from 2.19 per cent in Q2 of FY18 to 2.58 per cent in Q2 of FY19. Its ROA is stepped up to 0.16 per cent pulling up from -3.07 per cent. BOM posted NIM of 2.76 per cent, up from 2.64 per cent.

The Way Forward

The performance data from large PSBs and two of PCA banks clearly indicates recovery trends. The overall transformation of PSBs, if pursued consistently can improve their competitive ability and robustness in the long term. PCA is a globally practised framework for weaker banks to guide them to restore normalcy. Other large PSBs focused on asset quality management and augmenting profitability can further stabilise key interdependent performance parameters. The RBI initiative of implementing PCA in ailing banks, early alert system (SMA framework) and mandatory action under IBC – 2016 may have short term pain but is embedded with long term gains. In quest of quick gratification, these policies should not be diluted in the interest of stability and robustness of the banking system.

*The author is Director, National Institute of Banking Studies and Corporate Management – NIBSCOM. The views are his own