PSBs choke on bad loan mess

PSBs choke on bad loan mess

Public sector banks (PSBs) saw their loan book shrink for the first time in at least two decades as advances fell by Rs 1.35 lakh crore in FY17.

In comparison, PSBs had made fresh loans (onanet basis) of Rs 1.34 lakh crore in FY16.

Also, PSBs´ average capital adequacy is 40 per cent lower than that of private sector banks and half that of listed retail nonbanking finance companies (NBFCs).

Every Rs 100 worth of advances by PSBs were backed by Rs 10.4 worth of core capital or net worth during FY17. The corresponding numbers for private sector banks and listed NBFCs were Rs 17 and Rs 21.4, respectively.

The low capital adequacy constrained their ability to make fresh loans.

At the peak, PSBs had made fresh loans of over Rs 6 lakh crore during the fiscal year ended March 2014 (see adjoining chart).

The decline in advances of PSBs gathered speed during the current fiscal year, according to the Reserve Bank of India´s (RBI´s) 201617 annual report.

In value terms, fresh nonfood credit by commercial banks, which include both public and private banks, declined by around Rs 1.92 lakh crore during April June 2017 period.

In comparison, nonfood credit by banks had grown by Rs 26,300 crore during the first quarter of FY16.

The contraction has been led private sector banks and NBFCs continue grow their loan books, taking advantage of the growth opportunity opened up by the absence of PSBs in the lending market.

For example, private sector banks made fresh loans worth Rs 2.6 lakh crore in FY17, up from Rs 1.86 lakh crore in FY14.

During the same period, incremental annual lending by retail NBFCs nearly doubled to Rs 1.3 lakh crore last fiscal year, against Rs 66,000 crore in FY14.

Experts attribute the decline in PSBs´ dominance to their poor capitalisation, coupled withageneral risk aversion in view of their large pile of bad loans and the RBI diktat on cleaning up their balance sheet ratings are shifting their debt from banks to the bond market, leading in repayments to banks.

The corporate debt data, especially of the highly indebted companies for FY17, are not available yet. Companies in theBusiness Standard sample sawarise of about 5 per cent in their debt.

However, PSBs saw more repayment by their corporate and commercial borrowers than fresh borrowings, leading toadecline in their loan book.

Not surprisingly, market analysts are not sanguine about the future prospects of PSBs.

“After accounting for losses on account of bad loans, most PSBs don´t have any capital left to make fresh loans, especially large loans to the corporate sector.

I don´t foresee any immediate turnaround in their fortunes, given the government reluctance to recapitalise them adequately,” says Dhananjay Sinha, head of research, Emkay Global Financial Services.

This has resulted in business moving away from PSBs to private sector banks and retail NBFCs.

“As low down in credit growth by PSBs has opened a new growth avenue for private sector banks and NBFCs.

Their task has been made easier by an easy access to debt and equity capital for them,” says Karthik Srinivasan, senior vicepresident, Icra

The trend has only accelerated in FY18.

The net credit of housing finance companies shot up to Rs 22,500 crore during the first two months of FY18, from Rs 10,000 crore during the AprilJune 2016 quarter, according to the RBI annual report.

During the same period, net credit by large NBFCs jumped eight times to Rs 28,500 crore, from Rs 3,500 crore during Q1 FY17.

Separate data for private sector banks is not available.

In all, 12 out of 21 PSBs in the Business Standard sample reported negative credit growth last fiscal year, against seven in FY16; two in FY15 and none in FY14.

The country´s largest lender State Bank of India also sawadecline in its credit growth at the group level for the first time in many years.

Advances were down 5.1 per cent onayearonyear basis last fiscal as many of its erstwhile associates (which merged with the parent) shrunk their loan book.

Some of the major government owned banks reportingadecline in their loan book include Central Bank of India, IDBI Bank, Indian Overseas Bank, Dena Bank, Allahabad Bank and Indian Bank, among others.

The Business standard, New delhi, 09th September 2017