High stress: PSBs set aside over 60% of operating profit as provisions

The road ahead for overall asset quality remains uncertain and would depend on the likely emergence of a new wave of the pandemic.

Public sector banks (PSBs) have set aside more than 60% of their aggregate operating profits in the June quarter as provisions, the bulk of which is for loan losses and restructured assets. This is an indication the stress on lenders’ books remains fairly high. For the private sector, the share of operating profits that was allocated for total provisions was almost 50%.

Bankers say the first quarter saw stress mounting in the retail and small business segments as a result of the second Covid wave. Moreover, the demand from borrowers, asking for a recast of loans, was higher than last year. While Punjab National Bank’s provisions accounted for a whopping 77% of its operating profit, in the case of Bank of Baroda (BoB) the share was over 72%.

At BoB, for instance, the management confirmed the demand for restructuring has been higher this year than it was last year, leading to an increase in the provisioning for standard assets. Separately, the State Bank of India (SBI) management told analysts on August 4 the provisions relating to restructured accounts had been included in the provisioning of Rs 15,700 crore for standard assets.

PSBs reported a growth in loans for the June quarter of just 3.6% year-on-year; the total advances in FY21 grew 2.5%. The standing committee on finance observed, in its report presented before Parliament earlier this month, the present crisis is transient and should not become an alibi for privatisation of PSBs.

SBI, which saw asset quality deteriorate in the consumer loans segment in Q1FY22, said it had managed to recoup retail bad loans to the extent of Rs 4,700 crore after the June quarter.

Smaller PSBs like UCO Bank, Indian Bank and Indian Overseas Bank provided more aggressively out of their profits compared to their larger peers.

Sanjiv Chadha, MD and CEO, BoB, told FE that credit costs were likely to trend down through the rest of FY22 due to a turn in the corporate cycle. “If we look at the overall corporate cycle, it is improving significantly. Corporate slippages are coming down, that trend will continue and credit costs will come down,” Chadha said. In Q1FY22, a majority of BoB’s new bad loans came from the MSME segment, followed by the retail and agri portfolios. The bank said that it is already seeing a pullback from many of these small accounts.

Data from Capitaline shows that for a clutch of 12 PSBs, the share of operating profits earmarked for provisions was 63% while for a group of 18 private banks, the share was 49%. The data reveals absolute provisions in the June quarter fell year-on-year.

The road ahead for overall asset quality remains uncertain and would depend on the likely emergence of a new wave of the pandemic. On Tuesday, rating agency Moody’s said that while the economy would return to growth in FY22, the severe second coronavirus outbreak will delay improvements in asset quality. Regulatory measures will play a role in mitigating stress. “We expect loan-loss provisions will decline from 2020 levels across Asean and India but remain elevated compared to historical levels as banks continue to proactively make provisions against future increases in NPLs (non-performing loans),” Moody’s said.