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Bank of India, PNB Debt Ratios Skyrocket

A year ago, Bank of India's profit was almost four times State Bank of Bikaner & Jaipur's. But the latest numbers released on Tuesday have dramatically altered the picture: BoI's net profit is now less than half that of the SBI subsidiary as it grapples with mounting bad debt, which has more than doubled in the past 12 months.

The problem is not limited to BoI. It is much more deep rooted as evident from the quarterly results. Punjab National Bank, Union Bank of India and Syndicate Bank -three of the other six public sector lenders that declared results on Tuesday -reported sharp drop in profits during April-June, ranging between 22% and 84%.

Of the six, at the end of the June quarter, only State Bank of Travancore reported a reduction in the stock of non-performing assets, compared to a year ago.

Compared to the March quarter, PNB has managed to lower NPAs, but just marginally to around 6.47% from 6.55%. BoI's gross NPAs are estimated at 6.8% of its loans, a level not seen in at least 11 years.

For several quarters analysts and bankers have warned about the deteriorating financial health of state-run banks. But policymakers have maintained that the worst was over, and that things would improve as the economy gathers steam. Drastic measures to nurse the banks to sound health are rarely talked about and the preference is for short-term steps to paper over the wounds.

“Indian banks are unlikely to reduce their problem loan ratios in 2015-16 but the new non-performing loans will probably decline,“ Moody's Investors Service said, based on findings of a poll.

For the banking sector as a whole the NPA situation is as bad as it was more than a decade ago when some radical steps -from one-time settlement to setting up asset reconstruction companies -were initiated. The global economic boom and the rapid growth in India too helped banks clean up their books.

The economic slowdown and the failure of several projects to take off have once again hurt the asset quality in banks. The problem is more acute in public sector banks as they had to lend to companies and restructure loans after the 2008 financial crisis when the private sector virtually walked out of the market.

But the concerns are not limited to sticky assets.From the absence of fulltime managing directors to unusually high levels of oversight (not to forget the undue interference in the past) and directed credit flow, running a public sector sector bank is not an easy task. And, at a time when the economy is showing signs of a turnaround they have the tough task of funding that growth. It's a survival from quarter to quarter with no clear and visible plan to reverse the situation and tackle the problem head on.

“Everyone knows what the problem is but no one is fixing it,“ said a top banker.For instance, last July , the finance ministry spoke of setting up asset reconstruction companies for power and roads. But a year down the line the proposal is all but forgotten. For the moment, the focus is largely on providing additional capital to banks to comply with regulatory norms and to set up a bank bureau to deal with the managements of public sector players on issues such as raising capital or even deciding on mergers. But the NDA government's grand plan to strengthen bank boards with a new management structure is still to be implemented.By the end of the week, it will be a year since Bank of Baroda had a full-time managing director. It's a similar story at Canara Bank that has remained headless for 10 months, while PNB has had to make do with a part-time boss for nine months now.

Similarly , the signals that go out of finance ministry are not always clear. For instance, last fiscal, faced with fiscal strain, the government provided equity on the basis of performance parameters. But this year the rules of the game are going to be completely changed from all available indications. In any case, even getting the government to let them raise capital from the markets took months of convincing. The painfully slow decision making is slowly taking a toll on the health of these banks.

The rising levels of NPAs and capital constraints, along with low demand for loans, have forced these lenders to be very selecting in lending, something that may not augur very well for overall economic growth. “Public sector banks are facing multiple challenges. They have asset quality issues, require huge amount of capital and there are management issues.The huge recapitalization requirement has led to risk aversion and they are not growing their balance sheet significantly . Going forward we expect them to lose business because of this,“ said an analyst at a leading brokerage.