Poor loan quality, a major worry for public sector banks

BL :Biswa swarup Misra:30 june 2012

Banking busines in 2011-12 compared with 18.3 per cent in 2010-11 as the real GDP growth decelerated from 8.5 per cent to 6.5 per cent.

The growth deceleration, coupled with migration to system driven recognition of non-performing assets (NPAs), has led to the steep rise in bad loans.

The mainstream banking system consists of different categories of banks such as State Bank of India (SBI) and its subsidiaries, nationalised banks(NBs), new private sector banks (NPBs), old private sector banks(OPBs). 

The various categories of banks differ in their ownership structure, business philosophy, geographical presence, customer base, technology adoption, manpower profile and governance practices.

 How far these differences have influenced the performance of different categories of banks? We consider all the banks in each category except only 8 out of 14 old private banks and examine their performance across five dimensions — business growth, interest margin (NIM), asset quality (GNPA), operating efficiency (Cost to Income ratio) and profitability (RoA).

Business growth: Business growth for all categories of banks remained subdued in 2011-12 over 2010-11. The OPBs had the highest business growth followed by NPBs, NBs and SBI. The business growth was propelled by credit growth for all categories of banks. Thus, all categories of banks were affected by the liquidity shortage in the system.

NIM: NIMs declined in 2011-12 over 2010-11 for all categories of banks except SBI. Except for three banks each in the NB and NPB category, two banks in the OPB category, all other banks have a witnessed a deterioration in their NIMs. NIMs depend on the maturity profile of deposits and the bank’s ability to pass on the increased cost of funds to the borrowers. The fall in the NIM for majority of the banks possibly have been driven by the high cost of deposits in view of the liquidity shortage and inability to pass on the increased cost of funds fully to the borrowers in view of subdued credit growth.

GNPA: While both the NPBs and OPBS improved their asset quality in percentage terms, SBI and the NBs witnessed significant deterioration. However, as the loan portfolio grows, it is possible that the absolute amount of bad assets might increase. As such, the bad assets have to be seen relative to the loan portfolio. In absolute terms, GNPA in 2011-12 increased by 36 per cent for the NBs and SBI, by only 8 per cent for OPBs over 2010-11. For NPBs, GNPAs were maintained in 2011-12 at the same level in 2010-11. Growth of Advances was much higher than growth in GNPAs for all categories of banks except SBI in 2010-11. However, in 2011-12 in addition to SBI, NBs have witnessed a much higher growth in GNPA than growth in advances in 2011-12. As NBs and SBI account for more than 70 per cent of the banking assets of the system, the high levels of NPAs has drawn serious attention from the government and the RBI.

Cost to Income Ratio: Efficiency represented through cost to income takes into account the interplay of a bank’s interest bearing operations, non-interest income and operating expenses. Both the NBs and SBI improved their efficiency in 2011-12, where as NPBs witnessed a marginal decline and OPBs a significant decline. In terms of levels, NBs and SBI have similar cost to income ratios followed by NPBs and OPBs.

While for the SBI, the improvement in cost to income ratio is guided by a sharp rise of 33 per cent in net interest income, for NBs, it is a combination of reasonable growth in other income and containment in operating expenses. For NPBs, despite high growth in NII and other income, it is the increase in operating expenses by 22 per cent, which has pushed up this ratio. For OPBs, it is the subdued growth in other income and relatively higher growth in operating expenses which has kept their cost to income at relatively higher levels.

RoA: The interplay of NIMs, GNPAs and efficiency of operations was reflected in the profitability of different categories of banks. Both NPBs and SBI improved, OPBs maintained and NBs witnessed a decline in ROAs in 2011-12 compared to 2010-11.In terms of levels, NPBs had the highest RoA followed by OPBs, SBI and NBs.

Asset quality and lower operating efficiency have been the chief concerns of for NBs and OPBs respectively in 2011-12. Improving the RoA in a difficult operating environment is a commendable performance for the NPBs in 2011-12. SBI had seen a major blip in its performance in 2010-11. The asset quality further deteriorated in 2011-12.

As such, the improvement in RoA in 2011-12 is attributable to its pricing advantage and partly to the base effect.

 Many of the NBs have migrated to the system recognition of NPAs and have used 2011-12 to consolidate their balance sheets. This was a long pending house cleaning exercise which will add to their strength. If the growth scenario improves, they should be able to reap the benefits of their hard work.

(The author is Associate Dean, Xavier Institute of Management, Bhubaneswar. Views are personal)