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Profitability: A decade of decay

Litigation is a long-drawn process dampening the profitability of banks. For years to come, PSU banks may not be able to present strong balance sheets.

The banking sector in India has experienced an unprecedented decay of its loan assets during the decade FY2008 to FY2018. The continuous rise in the gross NPA ratios is an undesirable phenomenon. The highest gross NPA ratio among the 21 public sector banks was only 2.59 per cent in 2007. At the end of this decade, four banks had their gross NPA ratios rise above 20 per cent.

IDBI tops in gross NPA…

During the last decade, the banking sector has grown in size in terms of the volume of financial assets handled and the number of service outlets created. Along with these developments, the GNPA ratio has risen more than proportionately in almost all the banks. A decade ago, 10 banks among the 21 public sector banks had gross NPA ratios of less than one per cent. Now only two banks report single digit ratios.

Today, the GNPA ratios of these banks are ranging between 12 and 28 per cent. IDBI is topping the list with the GNPA of 27.95 per cent. Another five banks are struggling with GNPA remaining above 20 per cent. In the case of 12 banks, the ratios vary from 11 to 19 per cent. Relatively on the brighter side, there are two banks: Vijaya Bank having GNPA of 6.34 per cent and Indian Bank at 7.37 per cent.

All that glitters is not gold

The financial results of 19 banks out of 21, pre-sent a very gloomy picture. Ranked by net profit, in 2007 State Bank of India was topping the list with Rs. 4531 crore. Now it continues to hold this rank in terms of the ‘loss’ incurred during the year 2018 at Rs.12,955 crore! Punjab National Bank keeping company over the decade, has reported a loss of Rs.12,283 crore. In the advances to jewelry business, it is now evident that all that glitters is not gold. More prominent the bank, more significant is the loss. Only two small banks have been able to retain their bottomlines: Indian Bank at Rs.1259 crore and Vijaya Bank at Rs.727 crore. The amount of losses of five banks is over Rs.5000 crore and Indian Overseas Bank has the most significant amount among them – Rs.6299 crore. During FY2018, public sector banks have written off the total amount of Rs.1.29 lakh crore.

The decay continues

The ‘period of decay,’ appears to be extending beyond the last ten years. Even the State Bank of India, the biggest and oldest bank in the public sector, could not come out of this mess. There is an increase of Rs 24,286 crore in its bad loans during the March quarter, raising the volume of stressed assets to Rs 2.23 lakh crore. The merger of its associate banks is one of the additional factors, which has crippled this giant Bank’s profitability position by raising the gross NPA ratio. The deterioration of the credit assets of the public sector banks has been further aggravated by an increase of Rs.1.19 lakh crore during the last quarter of FY 2018.

The number of willful defaulters has been rising steadily during the last couple of years. Litigation is a long-drawn process dampening the profitability of banks.
Some of the banks, which have published their financial results for the first quarter of FY2019, do not reveal any improvement in their health. While four banks have reported a minimal amount of net profit, compared to the enormous losses incurred during FY 2018, there is no significant improvement in their GNPA ratios. It would be a Herculean task to recover substantial overdue amounts.

One ingenious measure adopted by some of them to augment their profits is the imposition of a penalty for not maintaining a minimum balance in deposits. As the rate of interest on small savings bank deposits is only 3.50 per cent, banks may not lose a significant amount, when the balance of deposits falls below the prescribed level. However, banks have adopted this route to strengthen their bottomlines. According to the available data, State Bank of India alone has collected Rs.1771 crore during the second quarter of FY 2018.
Other banks would not have remained behind!

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