Asset quality deteriorates @ PSU banks



Asset quality deteriorates @ PSU banks Rohit Joshi and Siddharth Tak/ZRG

India’s public sector bank woes continue to mount in view of private peers outperforming them during the second quarter this fiscal.

While private sector banks continue to deliver good results, public sector (PSU) banks have disappointed on earnings front along with asset quality deterioration in the second quarter of the current fiscal (Q2FY13).


PSU banks have posted huge gross non-performing assets (GNPAs) in Q2FY13. The level of deterioration in asset quality is disturbing and even the RBI Governor D Subbarao accepted that level of banks’ NPA is disturbing.

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A Zee Research Group (ZRG) analysis shows that PSU banks have seen huge increase in NPAs during the quarter under review as against the first quarter of the current fiscal (Q1FY13). For instance, in case of Punjab National Bank (PNB), the gross and net NPA (NNPA) as a percent of advances has increased by 1.32 percent and 1.01 percent respectively on sequential basis (QoQ). In absolute terms, while gross NPAs rose by 40 percent to Rs 14,024 crore, net NPAs’ have increased by 60 percent to Rs 7,883 crore.

Furthermore, GNPA and NNPA of UCO Bank has increased by 100 basis points (bps) QoQ and 71 bps QoQ to 4.88 percent and 2.94 percent respectively. Moreover, GNPA and NNPA of Allahabad Bank has increased by 99 bps QoQ and 101 bps QoQ to 2.95 percent and 2.1 percent respectively. Even, GNPA and NNPA of SBI has increased by 16 basis points (bps) QoQ and 22 bps QoQ to 5.15 percent and 2.44 percent respectively.


Explaining the rationale behind the deterioration in asset quality, SL Bansal, CMD, Oriental Bank of Commerce (OBC), said, “The major reason is that economy is not doing well. Earlier, GDP was growing at 8 to 9 percent as against the current growth of 5.5 percent. Naturally, in such a situation cash flows would be under stress and because of that parties are suffering. Moreover, high interest rates have added to woes.”


Rajiv Mehta, banking research Analyst at India Infoline averred: “High interest rates and the global economic slowdown have led to deterioration in the asset quality of PSU banks in India.”


Another school of thought came from P Jayaram Bhat, managing director, Karnataka Bank (a private sector bank), who asserted, “It depends on the individual portfolio of banks. As the economy is not growing, corporates are finding it difficult since their projects are not taking off.”

Throwing some light on the intricacies related to the NPA woes of PSU banks, Bansal at OBC, affirmed, “Few assets are facing problems due to certain regulatory clearances like in case of power projects there is an uncertainty whether that project has the requisite coal linkages with itself or not. Other large accounts are suffering because of the increasing interest rates as economy is not doing well. Steel, Real Estate and Textile are some sectors which are going through tough times.”


On the contrary, most of the private sector banks have witnessed an improvement in asset quality in Q2FY13. In case of HDFC Bank, GNPA as a percent of advances declined to 0.91 percent in Q2FY13 from 0.97 percent in the previous quarter. Similarly, GNPA of Axis bank has declined to 1.01 percent in Q2FY13 from 1.06 percent in Q1FY13. Furthermore, Development Credit Bank (DCB) and Karnataka Bank have reported a decline of 53 bps and 9 bps respectively.


Rejecting the comparison made between the asset quality of public and private sector banks, Bansal at OBC, argued, “Business model of private sector banks is different. Banks like HDFC or Axis don’t give huge money to infra projects and since they were late entrants they haven’t given loans to power distribution companies. All the public sector banks, by nature lend money to priority sectors like agriculture, SMEs etc and they suffer the most whenever there is pressure on cash flows.”


Reiterating the view, Vaibhav Agrawal, VP Banking, Research at Angel Broking, opined, “Pressure on SME’s profitability has negatively impacted the asset quality of the PSU banks in the India.”


Commenting on the outlook related to NPAs, Bansal at OBC, said, “Three months down the line interest rates are expected to fall. In the mean time, some large assets which have witnessed cost over runs may face problems. Therefore, Q3 remains a challenging quarter. However, improvement in asset quality can be seen from March onwards.”


Supporting the thought of Bansal, Mehta at India Infoline, said, “The asset quality concerns for the PSU banks are expected to persist for next couple of quarters.”