Bank of Baroda's stress disclosure a warning sign

MUMBAI: Shares of banks have been rallying over the past few months, something that analysts explain is an early indicator of the expected cyclical upturn in the economy. But the disclosure of stressed assets on the second largest public sector bank has come as a rude reminder that India's lenders have not healed from the pandemic's blow.

The rally may be just glossing over the bad loan holes in the balance sheets of banks. In its qualified institutional placement (QIP) document, Bank of Baroda reported that its special mention accounts (SMA) pile jumped to 21% by December quarter from just 8% in the fourth quarter of FY20. This is in addition to gross bad loans that the lender had reported and captures the full impact of the pandemic on the bank's loan book.

Analysts at Kotak Institutional Equities point out that data disclosure has been asymmetric among banks with wide differences. Headline asset quality metrics such as gross bad loan ratios have been distorted by judicial and regulatory forbearance. To be sure, banks have detailed their bad loans excluding the impact of the judicial forbearance. Even so, the true stress in the wake of the pandemic is still unclear. "The lack of data on the situation on the ground has made understanding of the recovery quite hard," the Kotak report said. "In our view, given the challenges on the ground and lack of credible information of the stress situation across all loan portfolios, it would be useful for lenders to give the SMA 0/1/2 along with 90+DPD (days past due) that is yet to be recognized."

Indeed, banks have detailed their gross bad loan ratio excluding the standstill on bad loan recognition imposed by the Supreme Court. But early signs of stress are captured by SMA and these are not detailed by most banks. SMA captures loans that are defaulted after one day and show defaults of upto 90 days after which the account is declared bad.

For Bank of Baroda, the increase in SMA numbers indicates that the stress is far higher than headline numbers show. Loans that are overdue by 60-90 days formed 5.5% of the loan book.