Sale of bad debt to ARCs boost bank results, but worries remain-LiveMint-
By Anup Roy & Ashwin Ramarathinam
Taking out problematic accounts help banks post healthy numbers, but analysts caution on fresh slippages ahead
Mumbai: On the face of it, the fiscal fourth-quarter earnings of Indian banks have indicated that the lenders have stopped deterioration in asset quality, as bad loans at most banks fell from the preceding three months, but analysts say the improvement has more to do with banks selling bad debt to asset reconstruction companies (ARCs).
The practice of selling bad debt to asset reconstruction companies and, thus, taking out the problematic accounts from lenders’ books, may have resulted in banks reporting healthier numbers, analysts said.
While they agree asset quality may not deteriorate dramatically from the present levels, they caution that fresh slippages, or good loans turning bad, and restructuring in banks are still high.
Bad debt in the 34 banks that reported their March-quarter earnings so far was at Rs.2.2 trillion, higher than the year-ago level of Rs.1.66 trillion but almost at the same level as it was in the three months ended 31 December. Between December and March, the banking system’s advances grew 5.75%, which means the share of bad debt in total advances fell. Gross bad debt ratio of the 34 banks that reported earnings was 4.32%, compared with 3.27% in the year ago, a Mint analysis of banks showed.
However, the sequential comparison could not be done for all these banks as barring a few, most don’t provide their December-quarter number for advances. For the analysis, the Reserve Bank of India’s (RBI’s) industry number could not be considered as those include foreign banks as well, segregated numbers for which are not readily available.
However, December-quarter numbers for the top 10 banks in terms of loan book, which include public lenders such as State Bank of India (SBI), Bank of Baroda, Punjab National Bank, Bank of India, and private lenders such as ICICI Bank Ltd, HDFC Bank Ltd and Axis Bank Ltd, are available. An analysis of their numbers shows gross bad debt as a percentage of total advances has indeed fallen.
In the March quarter, the gross bad debt ratio of these 10 banks was 3.77% against 3.43% in the year-ago period. However, in the December quarter, the gross bad debt ratio of these banks was at 4.03%.
For seven public sector banks in this list, aggregate gross non-performing assets (NPA) ratio was at 4.3% in the March quarter, compared with 3.84% in the year-ago period and 4.64% in the December quarter.
For the three private banks, which traditionally have much better control over their asset quality, the gross NPA ratios for the fiscal fourth quarter was 1.91%, compared with 1.97% in the year-ago quarter and 1.95% in the third quarter of 2013-14.
At a glance, the numbers may indicate that Indian banks’ March-quarter bad debt situation is better than the December quarter. But that would be a wrong conjecture, warn analysts.
One critical factor missing in these numbers is sale of assets to ARCs. While it is true that banks have always been selling assets to ARCs, the central bank especially nudged banks in the March quarter to sell bad assets to ARCs for better recovery of loans.
When a bank sells assets to ARCs, the bad assets are removed from the bank’s book and the security receipts issued by ARC are booked as investment.
When the ARC recovers the loan and pays the bank, the bank’s profitability increases.
The analyst declined to be named.
In 2013-14, the sale of bad loans to asset restructuring companies jumped to Rs.27,000 crore in 2013-14 against Rs.8,000 crore in 2012-13, a recent Credit Suisse report estimated.
The reason for this aggressive sale of assets was because of the central bank’s provisioning rules, effective 1 April, that made provisions on restructured loans jump to 5% from the 2% earlier.
In a report dated 17 March, news agency Press Trust of India cited a senior SBI official as saying that in the March quarter, the bank planned to sellRs.5,000 crore of its bad assets to ARCs.
PTI cited SBI chairperson Arundhati Bhattacharya as saying that this would be for the “first time” that the bank would be selling NPAs to ARCs.
She did not specify how much the bank was planning to sell.
On Friday, SBI said it wrote off Rs.5,698 crore of bad debt. The bank did not specify how much of these were sold to ARCs, but analysts say most of the write-off must have gone as sales to ARCs.
The write-off was above the Rs.5,077 crore written off in the December quarter and almost equals what it had written off in the whole of 2012-13.
In addition, SBI also reported fresh slippages of Rs.7,947 crore during the quarter, while it restructured Rs.8,090 crore of loans, more than double of its earlier guidance of Rs.3,700 crore.
The situation was the same in almost all public-sector banks in the fiscal fourth quarter. Except for a handful of public banks, including Bank of Baroda, most banks had high slippages on a sequential basis.
Slippages in Bank of Baroda was Rs.1,300 crore, compared with Rs.15,500 crore in the December quarter.
Slippages for Bank of India was at Rs.3,610 crore, more than double its December quarter level of Rs.1,747 crore.
For Punjab National Bank, the slippages in the quarter increased sharply toRs.2,385 crore against Rs.450 crore in the third quarter.
“If you see the slippages number, there is no way to say that PSU (public sector unit) banks are seeing an improvement in their asset quality. The opposite is not far from the truth,” said an analyst with a foreign brokerage house who also did not want to be named.
The heads of banks are not confident that the worst is behind.
The heads of SBI, Bank of Baroda, Bank of India, Punjab National Bank and some private banks have said as long as the economy doesn’t recover, there is no way the bad debt problem could be sorted out
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