Banking

Public sector banks continue to be the most stressed among lenders

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India’s banks saw their balance sheets come under pressure in FY21 because of the pandemic. This was visible in the anaemic loan growth and an increase in stressed loans. However, public sector banks not only had these fresh challenges but also had to deal with the worsening of their legacy bad loan pile.

Thus, the performance of public sector banks continues to be weak compared with their private sector peers. An analysis of 29 listed banks that have so far declared their results for the March quarter and FY21 shows that the outstanding gross non-performing asset (NPA) pile of public sector banks was more than three times that of private sector lenders. Much of this is because of troubled legacy corporate accounts. The surge in corporate bad loans was the highest among public sector lenders during FY17-FY20. The resolution of these loans has been slow. Weak economic growth has ensured that companies have continued to default repayments and upgrades have also been subdued. On the other hand, the stress on private sector bank balance sheets has been limited.

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Bad loan trouble

That said, defaults arising from the pandemic have been higher for private sector banks, especially after the removal of forbearances. Public sector banks reported a 7.1% rise in gross bad loans for the March quarter on a sequential basis. Private sector lenders reported a sharper 20.8% jump, the data shows.

The pandemic has hit individual borrowers and small businesses harder than large companies. Ergo, private sector lenders were hurt more because of their higher proportion of retail loans. Another factor contributing to higher gross bad loan ratios for public sector banks has been loan growth. Some of these lenders have reported a contraction of their loan book for FY21, unlike strong growth for private sector banks. Bank of India and Punjab National Bank saw their loan books shrink while most other lenders reported a single digit loan growth.

In contrast, most private sector banks reported loan growth faster than the industry. This along with fewer legacy bad loans kept NPA ratios low for private sector lenders.

That explains why despite sharp gains in share prices, public sector banks still lag behind the broad market and private sector peers. The Nifty PSU Bank index has barely crossed its pre-pandemic high in February last year. The Nifty Private Bank index and the broader Nifty have touched far higher levels.

However, analysts hope that legacy loans would be resolved faster now. Indeed, chief executives of public sector banks have indicated higher recoveries in FY22 and a drop in bad loans. Lenders have hacked away at their bad loan pile through write-offs. With a government-sponsored bad bank expected to take on default loans, public sector lenders could see outsized recoveries. However, the success of this depends on how fast the economy recovers.

What works in favour of public sector banks is their high level of provisioning. The average provision coverage ratio among public sector lenders is around 80% while that for private sector lenders it is around 70%. Moreover, most public sector lenders have fully provided for large troubled corporate accounts.

The pandemic has hit all banks equally. What may set lenders apart is the amount of provisioning they have and the large recoveries in corporate accounts. To that extent, public sector lenders may well turn a corner in FY22.

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