Tag: Finance Minister Nirmala Sitharaman

Finance Minister Nirmala Sitharaman last week, while making the announcement of the National Asset Reconstruction Company Ltd, claimed that the performance of public sector banks has improved, with just two public sector banks reporting losses.

“In 2018, just two out of 21 public sector banks were profitable. But in 2021, only two banks reported losses for the full year,” she had said.

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From 2015, when the Reserve Bank of India conducted an Asset Quality Review (AQR), public sector banks started to make a lot of provisions in their loans. Non performing assets in the banking sector jumped 80% in FY16, according to RBI data, quoted in the July 2015 AQR.

The AQR created havoc on banks’ profitability, especially affecting state-owned banks because majority of their loans were provided to corporates.

Banks had been directed to keep increasing provisioning of accounts that were restructured from 5% to 15%, and accounts that were classified as sub-standard (first category of NPA), would slip into doubtful category if it stayed sub-standard for 12 months, attracting 40% provisioning. And if the loan is not serviced at all, the bank would have to treat it as a loss account with 100% provisioning.

Major PSBs reported record losses for the first time in the fourth quarter of FY16, like Bank of Baroda with Rs 3,230 crore and Punjab National Bank with Rs 5,367 crore.

Banks entered an NPA cycle, till 2021. The government came out with two major relief measures – recapitalisation, starting 2017, and merger of smaller public sector banks with large anchor banks.

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“Mergers of the banks is the step in the right direction as fewer banks with larger balance sheets would be able to compete better in the market,” said Yuvraj Choudhary, research analyst at Anand Rathi Financial Services.

In FY18, there were a total of 21 public sector banks, and as Sitharaman said, only two public sector banks reported profits – Indian Bank and Vijaya Bank.

“PSBs were reeling under corporate asset quality burden for long, more so after RBI’s AQR exercise. This was aggravated by forced mergers, which led to losses due to accelerated recognition and provisioning. Growth too decelerated as banks were busy with merger and had capital constraints,” an analyst with Emkay Global Financial Services said.

Starting FY21, only 12 state-owned banks have remained. Six weaker PSBs had been merged with four anchor banks – Andhra Bank and Corporation Bank were merged with Union Bank, Oriental Bank of Commerce and United Bank of India with Punjab National Bank, Syndicate Bank with Canara Bank, and Allahabad Bank with Indian Bank.

In 2019, Dena Bank and Vijaya Bank were merged with Bank of Baroda, and IDBI Bank was recategorised as a private bank, with Life Insurance Corporation of India buying 51% stake. So far, IDBI Bank is the only PSB that has been privatised.

Mergers of public sector banks aided in reducing operation costs for the banks, but banks are not in the position to absorb any weak banks, according to analysts. “This is true even for SBI. Privatization of weak banks is the best way to weed them out,” the analyst at Emkay Global said.

Though mergers had caused a bit of a correction in the PSBs’ profitability earlier, mergers did not have any role to play in their profitability in FY21, analysts said.

“PSBs have turned profitable since past few quarters mainly due to healthy treasury gains and some lumpy corporate resolutions, (for eg. Bhushan Power). Impact of COVID-19 on corporate portfolio was relatively moderate, leading to further moderation in NPAs and lower incremental provisioning, which supported profitability,” the analyst at Emkay Global said.

Of the 12 banks, only two reported losses in FY21 – Punjab & Sind Bank and Central Bank of India.

Sitharaman, at the press conference last week, also said that banks have recovered Rs 3.1 lakh crore since March 2018.

This was possible because sizeable recovery from lumpy corporate NPAs, by way of cash and write-offs, was expected. Some resolutions including Essar, Bhushan, were major contributors to these recovery numbers, analysts said.

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