3 Indian banks suffer massive losses following bad loans

Wednesday 17th February 2016 04:53 EST
 
 

Three state-run lenders; Central Bank of India, Dena Bank and Allahabad Bank have reported massive losses, prompting concerns over the unsteady state of the financial sector. “The surgery is not over... Something which has to be cleaned up has to cleaned up. Everybody has to undergo the pain,” PNB managing director and CEO Usha Ananthasubramaniam said.

The trends available from the December-end quarter results and ICICI Bank's performance pointed towards tough times for other lenders as well following the Reserve Bank of India's bad loan clean-up drive. Analysts expect bank profitability to remain under stress for at least another quarter as RBI has given lenders two quarters to provide adequately for loans that are under pressure. Many steel and infrastructure companies are on the list where banks have had to keep aside more funds, known as provisioning, to stay within the regulator's red line. The banking sector has been in a bad state as bad loans soared following the impact of economic slowdown, which dented the books of companies after borrowed excessively during the boom years to fund projects, some of which never took off. As a result, the volume of stressed assets were estimated at around £80 billion. Unlike previously, new rules mandate that banks set aside funds for potential losses to avoid ballooning of risk when loans actually turn into a non-performing asset. A loan is classified as an NPA if an instalment remain unpaid for 90 days. This time, RBI's diktat after an asset quality review has gone beyond what banks classify as NPAs to include loans that were sticky. As a result, at the end of December 2015, the strict norms pushed up PNB, Central Bank and Dena Bank stock of gross NPAs by at least 49 per cent over the year ago level.

For Dena Bank, nearly a tenth of its advances have turned NPAs, while the ratio of gross NPA to advances for PNB was only marginally lower at 8.5 per cent of their total loans, levels which have not been seen in nearly 15 years when a massive systemic overhaul was undertaken, including legal changes. Powered by a surging economy gross NPAs of commercial banks had declined from over 12 per cent in 2000-01, to a little under 2.5 per cent in 2008-09. However, loans started coming under stress after the 2008 financial crisis but RBI and the government sought to protect banks through a set of special measures.

The sustained slowdown, however, pushed RBI to finally crack the whip late last year as the ratio of NPAs and restructured loans where instalments were being paid on time added up to nearly 11 per cent of advances for the public sector banks at the end of December 2014 and has been steadily rising. While banks were expected to put up a poor show, the performance was much worse than anticipated and saw stocks tumble.

Govt to push bank reforms, says Jaitley

The Modi government will soon initiate a series of reforms to improve governance in public sector banks (PSBs) which have reported losses in excess of £1 billion in an effort to get rid of bad loans.

Announcing plans for PSBs, finance minister Jaitley said India has not reached a stage where the government could pull out of banking. While privatization was not on the agenda, the government will address issues such as maintaining an arm's length relationship with banks and professionalizing bank boards. “Banks have to work on banking considerations. This is an area where we have probably erred in the past,” said Jaitley a the `Make in India' week. The finance minister said the PSU banks have played an important role in taking banking to the masses in the past and continued to do so under the Jan-Dhan Yojana, which was launched by the Modi government 20 months ago.


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