Banks’ declining health bad news

State Bank of India, India’s largest bank, has reported a large net loss of Rs 4,876 crore for the June quarter, its third straight quarterly loss. Two important contributors to this are the provisions that have been made for the depreciation in the value of its bond portfolio (Rs 7,098 crore) in a period of rising interest rates and payment of gratuity and wages (Rs 1,879 crore). While these results are disappointing, the silver lining to the cloud is that additional slippage in the status of loans has slowed. Reflective of this, gross non-performing asset (NPA) levels appear to be stabilising at 10.7% for the reporting quarter, a shade below that for the previous quarter. To keep cleaning up, provisions have been doubled in the June quarter. Net interest margin, the key bread-earner, rose by 24%, compared to a year ago, and the bank is on record that it expects to return to profitability in the December quarter. This will be aided by some recoveries, no matter how small post-haircut, coming in via the bankruptcy resolution process.

While it is reassuring that SBI appears to be turning the corner, its continued ill-health is symptomatic of the terrible state of the banking sector as a whole. With NPAs clocking 9.6%, the only large country that comes close is Russia at 9.4%. Compared to this, developed countries like the US and German have NPA levels at under 2%, and China officially belongs to the same league at 1.7%. Although China’s banking aggregates are not taken at face value and it is currently in the throes of another shadow banking crisis, the overall health of China’s banking sector is better than India’s.

The health of India’s banking system has deteriorated since 2015, when NPAs stood at 4.6% to reach 10.4% in the December quarter. The blame for this should not be laid at the door of the NDA government alone, but it is the result of the banking regulator RBI tightening the screws on asset classification practices. Simply put, banks were asked to stop “evergreening” and call a spade a spade. What is more, norms have been tightened further from February this year, much to the discomfort of the central government whose compulsion to recapitalise the public sector banks is directly related to their declared level of stressed assets. So the economic outlook has to factor in continued ill-health of the banking sector for some time to come. This is not good news in the medium term.

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