For every rupee of operating profit, Indian banks had to set aside 97 paise as bad loan provisions in the June quarter of FY19, data compiled from Capitaline showed. In other words, 39 listed banks could plough back only about 3% of their operating profits into capital as they had to set aside money to cover bad loans.
In the same period the previous fiscal year, the same banks could use around 22% of their operating profits after setting aside money for loan loss provisions. While the aggregate operating profit of these banks in Q1 FY19 stood at Rs.67,550.23 crore, their loan loss provisions were at Rs.65,929.26 crore in the same period. This was owing to a 21% year-on-year (YoY) increase in gross non-performing assets (NPAs) along with ageing provisions on legacy assets.
Of these, aggregate NPA provisions of private sector banks increased at a faster pace—61% year-on-year—compared with the 29% rise reported by their public sector counterparts.
The banks have already made provisions for bad loans the Reserve Bank of India (RBI) has recommended for bankruptcy proceedings in its first and second lists; however, lenders are expected to see another surge in provisions after the central bank’s stress resolution deadline of 27 August. Under RBI guidelines, banks have to make provisions of 40-50% when they refer an account to the National Company Law Tribunal (NCLT).
These pertain to provisions banks need to make for unresolved stressed assets under RBI’s 12 February circular, which gave banks 180 days from 1 March to approve resolution plans for loans above Rs. 2,000 crore. A substantial portion of this is from the power sector. Power is one of the highly stressed sectors with close to Rs.1 trillion of loans soured or recast. A report on the impact of RBI’s stressed asset rules, tabled in the Parliament on 7 August, said about 66 gigawatt (GW) capacity of independent power producers is under various degrees of financial stress. This includes 54.8GW of coal-based power (44 assets), 6.83GW of gas-based power (nine assets) and 4.57GW of hydropower (13 assets).
According to Karthik Srinivasan, group head, financial sector ratings at Icra, the amount of incremental provisions for accounts that are referred to NCLT after 27 August is uncertain at the moment. He said it might not be a one-time hit on banks’ books and that the central bank might allow it to be spread over a few quarters.
“Provisions are going to remain elevated in the coming quarters and the only way provisions could fall is if haircuts in NCLT one and two accounts are lower than the expected level of 50-55%. Therefore, pressures on banks’ P&L (profit and loss) will continue throughout FY19,” Srinivasan added. For instance, SBI has made provisions for 71% of the total loans in the two RBI lists. “What we have done is that, particularly for NCLT one list, it is now completely aligned for all accounts, whatever is the resolution plan—recovery or liquidation or whatever is the situation. So, there is no requirement for provision on NCLT one list,” Rajnish Kumar, chairman, State Bank of India recently told analysts. These two lists name loan accounts the RBI wants referred to the bankruptcy court if they fail to find suitable turnaround plans. However, some bankers believe provisions for bad assets have been largely taken care of and going forward, they would not erode their profits.
Rajnish Kumar, chairman, SBI told reporters after announcing the bank’s first quarter results that it hopes to turn profitable from the December and March quarters of FY19.
Among private sector banks, Dhanlaxmi Bank has seen the highest y-o-y growth in provisions at 248% in Q1 FY19, albeit on a smaller base. Others who witnessed substantial rise in provisions include Kotak Mahindra Bank (131% y-o-y), ICICI Bank (129%) and Yes Bank (119%). Most of the 21 public sector banks reported higher provisions in the June quarter led by Punjab & Sind Bank (207%), Dena Bank (186%), Central Bank of India (147%) and IDBI Bank (146%).
Sandeep Bakhshi, chief operating officer, ICICI Bank told analysts at a conference call following the bank’s first quarter earnings that the core operating profit of the bank remains strong. “However, provisions in FY19 are expected to remain elevated,” he added.
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