The results of public sector banks (PSBs) for the quarter ended March 2020 (fourth quarter, or Q4) show an improvement in asset quality. On an aggregate basis, the average gross non-performing asset (NPA) ratio of eight listed PSBs, which have announced their Q4 numbers so far, have declined 132 basis points (bps) sequentially to 10.8 per cent. Independently, each of these banks has reported a decline in gross NPA, ranging between 15 bps and 396 bps (see table). On a year-on-year (YoY) basis, too, average gross NPA ratio of these eight banks is down 115 bps.
Though these numbers look good, the Reserve Bank of India’s moratorium has helped banks post lower NPAs.
“Though PSBs’ reported gross NPA numbers are seeing some progress, they have benefited due to the moratorium availed of by borrowers,” says Prakash Agarwal, head of financial sector ratings at India Ratings and Research. Had the moratorium not been there, NPAs would have been higher. The moratorium has resulted in the standstill status of the account as of February end. It is likely that a large proportion of accounts — which would otherwise have slipped into non-performing loans in March — would have availed of the moratorium, he adds.
Lalitabh Srivastawa, deputy vice-president at Sharekhan, agrees. He says, “The moratorium has helped PSBs to report lower NPAs in Q4.” However, the real picture will emerge in the September quarter, he cautions.
Following the Covid-19-led lockdown, borrowers have been allowed to delay their repayment of dues falling between March and August by three months. Like private sector peers, PSBs, too, have granted moratorium to their borrowers, which has prevented any loan-account downgrade.
Canara Bank and Punjab National Bank have up to 30 per cent of their loan book under moratorium, while it is higher for Bank of Baroda and Bank of India, at 65 per cent and 47 per cent, respectively.
Slippages of many PSBs declined by at least 40 per cent sequentially in Q4. This was partly aided by higher slippages in the third quarter of 2019-20 (high base effect) when some large accounts turned bad. Write-offs and improvement in credit profile of borrowers have also supported asset quality in the recently concluded quarter.
Unlike major private banks, there is some ambiguity in the way some PSBs account for the moratorium. For instance, Canara Bank and State Bank of India (SBI) do not consider the account under moratorium if the customer has paid at least one and two instalments, respectively.
SBI says it has given the moratorium to all its borrowers and around 23 per cent of its term loan customers have availed of the moratorium. “This does not give clarity in terms of asset quality,” says an analyst at a domestic brokerage.
Though some banks, including private, have seen lower moratorium, analysts are sceptical of their asset quality.
Mona Khetan, analyst at Dolat Capital, says, “We believe slippages in the banking sector, including PSBs, would be higher once the moratorium period is over.” However, the rise in provisioning would not be high for PSBs that already have higher provisioning and a decent provision coverage ratio.
Since the past couple of years, most PSBs have been aggressively providing for and/or writing off NPAs. And, Q4 was not different. So, even as the rate of increase in provisioning may not appear high (some have even reported a decline), in absolute terms, it remains elevated. Therefore, despite a rise in operating profit, most PSBs barring SBI, reported a loss at pre-tax level.
On the balance sheet front, advances grew by around 5 per cent YoY and net interest income was up 3.3 per cent on an aggregate level for the eight PSBs. In fact, some banks like SBI expect advances to improve in 2020-21 to 7-8 per cent, from 5.6 per cent in 2019-20.