Illustration by Ajay Mohanty
The expectation of a stable asset quality profile for private banks
has been shattered in the second quarter ended September 2017 (Q2) as the Reserve Bank of India (RBI) asked some banks
to treat certain accounts as bad loans and accordingly make provisions.
Termed “divergence” in industry parlance, the difference in views over bad loans has hurt investor sentiment.
Gross non-performing assets (NPAs) of 13 private lenders that have declared their results so far in Q2 increased to Rs 96,987 crore by the end of the quarter from Rs 87,664 crore for the quarter ended June 2017 (Q1 FY18).
Gross NPAs were up sharply compared to Rs 68,197 crore at the end of the September 2016 quarter (Q2 FY17).
With bad loans up, provisions and contingencies (P&Cs) also shot up by 35.7 per cent from Rs 8,196 crore in Q1 FY18 to Rs 11,125 crore in the September quarter. However, P&Cs were down by 11.8 per cent year-on-year from Rs 12,616 crore to Rs 11,125 crore in Q2 of FY18.
Senior private sector bank executives said the rise in provisions was on three counts: One, the slippages in Q2; second, banks
made incremental provisions for ageing bad loans; and thirdly, banks also set aside money for the assets which the RBI has asked them to treat as NPAs following the audit for FY17. The banking regulator asked some private banks to classify certain loans as NPAs for FY17 and accordingly make provisions. Three private lenders — Axis Bank, YES Bank, and Lakshmi Vilas Bank — were hit significantly in the quarter ended September 2017 by this directive.
Going by the RBI’s rules, if the regulator’s assessment of bad debt numbers for a financial year differs from the bank’s assessment by more than 15 per cent, the total divergence should be disclosed.
A senior RBI official said there was no change in methodology in calculating NPAs.
The divergence for 2015-16 was reported in May this year. However, the RBI decided to conclude the audit for 2016-17 soon after and asked banks to report on the divergence in the September quarter itself.
Though HDFC Bank did not face a significant impact of the RBI’s audit for divergence in gross NPAs, the banking regulator asked the bank to treat the advances to one project as a bad loan. As for ICICI Bank, the regulator is yet to conclude its audit. Details pertaining to this will reflect in the third quarter results ended December 2017.
Axis Bank, ICICI Bank and YES Bank had a major share in provisions, given their large balance sheets vis-à-vis the rest of the 10 banks. For ICICI Bank, P&Cs saw a hefty 72 per cent increase at Rs 4,503 crore from Rs 2,609 crore.
ICICI Bank has made a provision of Rs 651.17 crore for the 12 accounts referred to the National Company Law Tribunal (NCLT). While the bank had the option to spread the provision burden over three quarters, it decided to make a one-time provision in the September quarter its self.
Axis Bank’s provisions surged to Rs 3,140 crore in Q2 FY18 from Rs 2,341 crore in the previous quarter.
YES Bank’s Q2 provisions moved up to Rs 447 crore from Rs 286 crore in Q1.
South Indian Bank saw a very sharp rise in provisions to Rs 453 crore in Q2 over Rs 224 crore in the June quarter.
Lakshmi Vilas Bank’s bill grew sequentially to Rs 187 crore from Rs 112 crore in Q1.
Thanks to the surge in bad loan provisions, the combined net profit of these 13 private banks dipped by 7.1 per cent to Rs 10,334 crore in Q2 FY18 compared to Rs 11,119 crore in June quarter. Net profit was up by just 1.1 per cent compared to Rs 10,222 crore in Q2 of FY17. Their net interest income (NII), the difference between interest earned and interest expended, rose by 3.2 per cent to Rs 29,225 crore in Q2 as compared to Rs 28,308 crore in June quarter; the same was up 15 per cent over the year ago period’s Rs 25,373 crore.
Other income comprising revenues from treasuries, fees, and commissions was a shade better with a 7.5 per cent rise in Q2 at Rs 16,159 crore as against Rs 15,025 crore in Q1 of FY18.
However, it was down 13.4 per cent compared to Rs 18,664 crore in Q2 FY17.