In just three months, India’s state-run banks have already posted $6 billion in losses

All that will be left, soon.
All that will be left, soon.
Image: AP Photo/Bikas Das
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Fourteen of India’s 21 state-run banks have declared their results for the January to March 2018 quarter so far. Only two managed to stay in the black. The remaining 12 have accumulated over $6 billion (Rs42,043 crore) in losses.

State Bank of India (SBI) and Punjab National Bank (PNB), the country’s top two public sector lenders (PSBs), have reported their biggest ever quarterly losses. Vijaya Bank and Indian Bank are the only ones to register profits. Others, including Bank of Baroda, Bank of India, IDBI Bank, Corporation Bank, Indian Overseas Bank, United Bank, and Andhra Bank, are yet to declare their results. 

What led to this?

The banks are feeling the heat following the introduction of new norms by the Reserve Bank of India (RBI) for faster recognition of stressed assets. Of the total loans in the Indian banking system, 11.9% were deemed stressed as of December 2017. So out of every Rs100 lent out, Rs11.90 was at risk of not being recovered.

So the central bank, in February, brought out a rule forcing banks to immediately recognise troubled accounts. Lenders are also required to act promptly, leaving little room for any accounting jugglery. In the past, banks were blamed for letting entities borrow afresh to repay old loans, perpetuating a problem instead of nipping it in the bud.

Banks are required to set aside funds for soured loans or those that are likely to turn sour. It’s this increased provisioning that has burnt a hole in lenders’ balance sheets.

In all, the gross non-performing assets (NPAs) of the 14 PSBs that have reported their quarterly results have jumped from 9.94% at the end of the March quarter last year to 13.41% this year, according to a report by Care Ratings, released on May 22.

Indian banks had piled up gross NPAs of Rs8.41 lakh crore as of December 2017. The figure was expected to increase significantly by the end of the March quarter, once all the banks report their numbers, since PSBs account for a major share of the bad-loan problem.

Investors rejoice

Despite the bloody balance sheets, the stock markets seem unperturbed. For instance, despite its record losses, shares of SBI surged to a six-week high on May 22. “Last year was one of despair, this year is of hope and the one ending March 2020 will be one of happiness,” SBI chairman Rajnish Kumar said in a press briefing after the results were declared.

This strange market tendency to reward badly performing banks is based on expectations that the worst is over. We’ll know for sure in the next few months.