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Good times ahead for banking?

LiveMint logoLiveMint 15-06-2014 Tamal Bandyopadhyay

With Narendra Modi-led government at the helm, most bankers feel acche din aane wale hai (good times are coming). Their belief has been strengthened after some of them met finance minister Arun Jaitley last week. The key takeaway from the meeting is that the government will do everything possible to push stalled projects for completion. A few hundred big and small core sector projects have been stymied in absence of various clearances and the money involved is about `10 trillion. If indeed these projects start moving, the banking sector will heave a sigh of relief as a large chunk of their bad assets originates from them.

If one takes a close look at the data on bad assets, one is not convinced as yet that the good days are here but it seems that the worst is behind us. Collectively, the gross bad assets of 40 listed Indian banks have grown about 34.4% in 2013-14 that ended in March—from `1.8 trillion to `2.42 trillion—but in the last quarter, their bad assets actually dropped by 0.61%. Similarly, the net bad assets of these banks, after setting aside money or making provisions, rose 43.3% in 2014. Indeed a key reason behind the drop in bad assets is banks’ aggressive sale of such assets to asset reconstruction companies (ARCs) towards the end of the fiscal year but there’s nothing wrong with this. Sale of bad assets to ARCs is an internationally accepted phenomenon and the banks should continuously do this as long as it is done with prudence.

United Bank of India tops the list of banks with highest gross bad assets—10.47% of loans—and there are six other banks that have at least 5% gross non-performing assets (NPAs). They are Central Bank of India (6.27%), Dhanlaxmi Bank Ltd (5.98%), Allahabad Bank (5.73%), State Bank of Mysore (5.54%), Andhra Bank (5.29%) and Punjab National Bank (5.25%). Indian Overseas Bank and State Bank of India have close to 5% gross NPAs in March. But the interesting thing to note is while only seven banks have shown improvement in the asset quality in March 2014 over March 2013, 26 of the 40 listed banks have improved their asset quality in the December quarter and for two banks—HDFC Bank Ltd and Jammu and Kashmir Bank Ltd—it has remained unchanged.

The net NPA figures reflect a similar story. Here too, Kolkata-based United Bank of India leads the pack with 7.18% net NPAs. At least seven banks have posted over 3% net NPAs in the March quarter—Allahabad Bank (4.15%), Dhanlaxmi Bank (3.8%), Central Bank of India (3.75%), Lakshmi Vilas Bank Ltd (3.44%), Punjab and Sind Bank (3.35%), State Bank of Mysore (3.29%) and Andhra Bank (3.11%). While only four banks have shown lesser net NPAs in the March quarter from the year-ago period, as many as 23 banks have improved the quality of assets in the last quarter and for two of them (HDFC Bank and Jammu and Kashmir Bank), it has remained unchanged.

It’s too early to get excited about the improvement in quality of assets as one needs to consider the pile of restructured loans too, a part of which may ultimately turn bad. Till March end, 622 cases worth `4.3 trillion debt were referred to the so-called corporate debt restructuring (CDR) cell. Out of these, 476 cases worth `3.3 trillion were approved. Add to this the debt restructuring done by banks through bilateral agreements with their borrowers and the pile will rise to at least `6 trillion. Overall, `8.42 trillion stressed assets of Indian banking system constitute 13.8% of total banking assets.

The collective net profit of listed Indian banks dropped last fiscal year by 1% but things may look up now as with the shrinkage in bad assets they will require to set aside less money. Apart from the government push to clear the stalled infrastructure projects, here are other reasons to make the banking community happy.

Indian corporations are showing faint signs of a recovery, as sales in the March quarter rose at the fastest pace in seven quarters and profit growth stabilized. A Mint analysis of 275 of the BSE-500 companies that account for 93% of market capitalization of all listed firms reveals that aggregate net sales of these companies rose 6.63% in the March quarter from a year earlier, the fastest expansion in past one year, driven by export-focused industries.

The export growth hit a six-month high in May to $28 billion against $24.91 billion in the year-ago period. Rising in two consecutive months of the new fiscal year after a lacklustre 2013, exports registered a growth of 12.4% in May. The return to double-digit growth after several months, if sustained, will signal a revival of global demand and that’s certainly a good news for Indian corporations.

The latest economic data released last week also signal a change for the better for Asia’s third largest economy which has been trapped in a low growth-high inflation phase for past few years, registering less than 5% economic growth in seven of the last eight quarters. The factory output grew 3.4% in April, the highest in 12 months, after contracting 0.5% in March. A drop in food inflation from 9.6% to 9.3% led to easing of retail inflation to 8.3% in May from 8.59% in April. But more important than that, the so-called core inflation or non-food, non-oil, manufacturing inflation dropped to a 11-month low of 7.72%.

If the trend continues, the Reserve Bank of India will be able to achieve its target of 8% retail inflation in January 2015 and there won’t be any need for raising interest rates. There’s no harm in expecting, with cautious optimism, “acche din aane wale hai”.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to

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