Public sector banks witness turnaround in performance
NEW DELHI: India’s public sector banks (PSBs) have seen a turnaround in performance and quality of assets, experts said, pointing to the robust performance of the country’s 12 PSBs and especially State Bank of India’s (SBI’s) record ₹13,264.52 crore net profit in the second quarter of 2022-23 compared to a net loss of ₹6,547 crore in FY18.
The government’s decision to launch an asset quality review (AQR) on April 2015 to unearth hidden non-performing assets (NPAs) was the first major step in strengthening the Indian banking sector, dominated by PSBs, five experts said, adding that the results are now being seen.
Union finance minister Nirmala Sitharaman tweeted on November 7: “The continuous efforts of our govt for reducing the NPAs & further strengthening the health of PSBs are now showing tangible results. All 12 PSBs declared net profit of ₹25,685 cr in Q2FY23 & total ₹40,991 cr in H1FY23, up by 50% & 31.6%, respectively (y-o-y).”
SBI saw a 74% jump in its net profit in the period, the number was 89% for Canara Bank (₹2,525 crore), 145% for UCO
Bank (₹504 crore), 58.7% for Bank of Baroda at ₹3,312.42 crore, and 12% for Indian Bank at ₹1,225 crore. Stocks of many PSBs, including SBI, surged to 52-week highs that day. Anand Dama, senior research analyst at Emkay Global Financial Services Ltd said SBI made a strong comeback in the quarter “on the back of robust credit growth, sharp margin uptick and lower LLP (loan loss provisions)”.
Prime Minister Narendra Modi dedicated digital banking units (DBU) to the nation on October 16 and spoke of the transition from unprofessional “phone banking” (loans granted to those with political connections) to process-driven decision-making based on commercial considerations. “The economy of a country is as
progressive as the strength of its banking system. Today, India’s economy is moving forward with a continuum,” he said.
The 2015 AQR saw a surge in NPAs of PSBs from ₹2.17 lakh crore on March 31, 2014 to ₹8.96 lakh crore on March 31, 2018 mainly due to indiscriminate lending.
Since then, SBI’s net NPAs have fallen below 1% (of advances) at 0.80% in Q2 of FY23; this was 5.73% in FY18. In Q2 of FY23, the net NPA of Canara Bank was down by 1.02 percentage points at 2.19% compared to the same quarter a year ago at 3.21%, and significantly down from 7.48% in March 2018. Other banks also saw a sharp decline in NPAs. The net NPA of Indian Bank reduced by 1.76 percentage points to 1.50% in Q2
FY23 from 3.26% in the same period previous year.
Gayathri Parthasarathy, partner and leader of financial services at PwC India said NPA issues were the pain point for PSBs, but this is now a matter of past after a focused “clean-up” of the stressed books. As corporate profits are now improving along with robust economic growth, public sector banks are seeing a return to profitability, she said.
“Financialization of household wealth, increasing investments into financial assets instead of physical assets – helping strengthen liability/deposits franchise and thereby improving cost of funds,” she added.
Aashay Choksey, Vice President & Sector Head- Financial Sector Ratings at ICRA said the banking sector has also benefited from interventions such as moratorium, Emergency Credit Line Guarantee Scheme (ECLGS) and restructuring announced during the Covid period.
“Moreover, PSBs, which were struggling prior to the onset of the pandemic on multiple fronts, including weaker capitalisation levels and losses, were aided by a meaningful recapitalisation programme.
This led to the shoring up of the provision cover on NPAs, wider capital cushions as well as an improvement in the solvency profile,” he added.
Experts said government’s policy reforms of entire financial sector helped in making financial institutions strong. “Akin to PSBs, private banks and NBFCs have also been aggressive on quality lending both in the institutional and retail space,” said Karan Mitroo, partner, Luthra & Luthra Law Offices India.
Experts are also confident about better performance by private banks.
“Private banks are more efficient in profit maximisation. Private sectors banks (especially large ones like HDFC, ICICI), seem to have outperformed in the banking space with massive growth in quietly profits (HDFC earned net profit of ₹ 10,605.8 crore),” according to Parthasarathy.
Choksey said private sector banks continue to witness strong growth and improvement in the headline asset quality metrics and profitability, with the exception of a few midsized banks that are dealing with seasonally higher or episodic spikes in slippages. “Moreover, private banks are largely well capitalised and well placed to grow without needing to raise capital in the near term,” he said.