India's Worst Performing Banks on this All-Important Ratio

The December 2021 quarter was a good one for PSU banks. As the economy recovered, the credit growth of these banks improved and NPAs declined.

However, a closer glance at the balance sheets suggests that write-offs were an important way of reducing bad loans.

While many banks saw the value of write-offs fall quarter on quarter, numbers were elevated nonetheless.

This comes as no surprise since PSU banks are notorious for having a high number of stressed assets or non-performing assets (NPAs) on their balance sheet.

What are NPAs?

A non-performing asset (NPA) is a loan or advance for which the principal or interest payment is overdue for 90 days.

They are of two types - gross NPAs and net NPAs. Gross NPAs refer to the total amount of debts a bank has while net NPAs refer to the total amount of stressed assets the bank has after accounting for provisions.

High NPAs indicate that the bank is in poor health as they place a significant burden on the bank.

A significant number of NPAs over time may indicate that the financial situation of the bank is at risk.

Here are five banks with consistently high NPAs.

#1 IDBI Bank

Leading with a 5-year-average gross NPA ratio of 26.2 is IDBI Bank. This means that of every Rs 100 in loan given by IDBI Bank, Rs 26.2 is not recovered by the bank.

The bank's 5-year average net NPA ratio stands at 9.23.

IDBI bank has incurred major losses in the last few years due to its corporate NPAs. In the last seven years, the bank has written off bad loans worth Rs 460 bn.

For the financial year 2021, IDBI Bank's gross NPA ratio stood at 27.53 while its net NPA ratio stood at 1.97.

The bank has been focusing on reducing its NPAs by recoveries and write-offs but its NPAs have still not come down due to slow growth in advances.

The bank's management has said that it expects around 4-5% reduction in NPAs with growth in advances. The transfer of bad assets to the government's bad loan bank will further reduce the NPAs by 5-6%.

The bank is no longer subject to strict lending curbs, which were imposed by the Reserve Bank of India (RBI) in May 2017.

The private sector lender has been taken out of the prompt corrective action (PCA) framework.

PCA is a supervision tool initiated to help improve the overall performance of banks.

For more details about IDBI Bank, check out the bank's factsheet.

#2 Indian Overseas Bank (IOB)

Second on our list is Indian Overseas Bank with a 5-year-average gross NPA of 19.22 and a 5-year-average net NPA of 9.83.

The bank's high NPA ratios are also due to NPAs in the corporate segment. Around 40% of all corporate loans given by the bank are NPAs.

Currently, only 44% of corporate loans are rated A or above while the rest 56% are rated BBB or below by credit rating agencies.

As of March 2021, the gross NPA ratio of Indian Overseas Bank stood lower at 11.69 while net NPA fell to 3.58. The bank has been trying to reduce its NPAs using multipronged and focused recovery initiatives.

The RBI has also taken Indian Overseas Bank (IOB) out of the PCA framework on improvement in financial and credit profile.

This decision gives the Chennai-based bank more freedom for lending, especially to corporations and grow the network, subject to prescribed norms.

IOB was placed under PCA in October 2015 on account of high NPAs and a negative Return on Assets (RoA). It was barred from increasing risk-weighted assets.

For more details about IOB, check out the bank's factsheet.

#3 Central Bank of India

Third on our list is Central Bank of India with a 5-year-average gross NPA ratio of 18.81 and 5 year net NPA ratio of 8.49.

Just like the above two PSU banks, Central Bank's high NPA ratios are also due to NPAs in the corporate segment.

35% of total advances of the bank are corporate advances, followed by retail (27%), MSME (20%), and agriculture (18%).

For the financial year 2021, Central Bank's gross NPAs stood lower at 16.55 while net NPA were 5.77.

The bank is expecting resolution of certain big NPA accounts through NCLT under the Insolvency and Bankruptcy Code (IBC) and outside during the current fiscal year. It plans to continue to focus on NPA recovery and improve its asset quality during the year.

Central Bank of India is the last remaining public sector lender under the RBI's PCA framework. However, it may see such restrictions lifted soon.

The bank meets all the parameters for exiting the PCA framework and the RBI will remove it from PCA as soon as the end of this fiscal year.

For more details about Central Bank of India, check out the bank's factsheet.

#4 UCO Bank

Fourth on our list, is UCO Bank.

The bank has a 5-year average gross NPA ratio of 18.62 and a 5-year net NPA ratio of 8.23.

Its loan book demonstrates exposure to various industries such as infrastructure (22%), NBFC (20%), basic metal (12%), construction (4%), food processing (4%), textile (3%), engineering (7%), and others.

Retail advances account for 26% of total advances of the bank, followed by MSME (26%), corporate and others (26%), and agriculture (22%).

UBO Bank's asset quality, although poor, has improved over the last couple of years. The bank's gross NPAs declined to 9.59 during the financial year 2021 while net NPAs came in lower at 3.94.

The improvement in asset quality was due to improved recoveries, upgradation of accounts and write-offs.

Currently, 55% of the bank's loan book is rated A or above by credit rating agencies while 32% is rated BBB or below. 13% of the advances are unrated.

The bank had been under the restrictions of Prompt Corrective Action (PCA) from March 2017.

In September 2021, RBI removed the bank out of PCA on account of an improvement in asset quality, capital position and earning profile.

For more details about UCO, check out the bank's factsheet.

#5 Punjab National Bank

Last on our list is Punjab National Bank.

The bank has a 5-year-average gross NPA ratio of 14.95 and a 5-year-average net NPA ratio of 7.42.

Corporate NPAs plague PNB as well. Corporate advances account for 48% of the loan book, followed by retail (18%), MSME (18%), and agriculture (16%).

The bank's corporate loan book has exposure to many industries. Industries with top exposure include energy (22%), roads & ports (15%), basic metals (15%), telecom (9%), textiles (6%), chemicals (5%) and others.

For the financial year 2021, PNB's gross NPAs stood at 14.12 while net NPAs stood at 5.73. The bank is targeting to bring down its NPAs during the ongoing fiscal year on the back of a recovery plan.

The lender is expecting recoveries to the tune of Rs 50 bn in the ongoing quarter from cases that are being resolved through National Company Law Tribunal (NCLT) and otherwise, as well as small accounts.

Of this, a recovery of Rs 10 bn is expected from NCLT cases and Rs 23 bn from non-NCLT cases. From small accounts, the bank is expecting a recovery of Rs 20 bn, taking the overall recovery to Rs 50 bn.

For more details about Punjab National Bank, check out the bank's factsheet.

PSU Banks vs Private Banks - Asset Quality

As you can see, all of the above banks are PSU banks. In fact, the next five banks with highest NPAs are also PSUs.

Don't believe me? Take a look...

Indian Banks with the Highest NPAs

Bank	5 Yr Avg Gross NPA	5 Yr Avg Net NPA	Gross NPAs (2020 - 2021)	Net NPAs (2020 - 2021)
IDBI Bank	26.22	9.23	27.53	1.97
Indian Overseas Bank	19.22	9.83	11.69	3.58
Central Bank of India	18.81	8.49	16.55	5.77
UCO Bank	18.62	8.23	9.59	3.94
Punjab National Bank	14.95	7.42	14.12	5.73
Bank of India	14.84	5.60	13.77	3.35
Bank of Maharashtra	14.57	7.15	7.23	2.48
Union Bank of India	13.95	6.39	13.74	4.62
Punjab & Sind Bank	12.28	6.75	13.76	4.04
Bank of Baroda	10.12	3.95	8.87	3.09

Data Source: Ace Equity

Private banks, on the other hand, have demonstrated superior asset quality as compared to the above PSUs in the last five years.

Take a look at the table below.

The 5-year average gross NPA ratio and 5-year average net NPA ratios are much lower than that of PSU banks. They are also far more profitable and lead their public sector counterparts in most other metrics.

NPA Ratios of Indian Private Banks

Bank	5 Yr Avg Gross NPA	5 Yr Avg Net NPA	Gross NPAs (2020 - 2021)	Net NPAs (2020 - 2021)
HDFC Bank	1.26	0.38	1.32	0.40
IndusInd Bank	1.86	0.74	2.67	0.69
DCB Bank	2.35	1.12	4.09	2.29
RBL Bank	2.39	1.26	4.34	2.12
AU Small Finance Bank	2.50	1.36	4.30	2.20
Kotak Mahindra Bank	2.50	0.98	3.25	1.21
Equitas Small Finance Bank	2.89	1.58	3.59	1.52
Bandhan Bank	2.90	1.12	6.81	3.51
The Federal Bank	2.90	1.39	3.41	1.19
IDFC First Bank	3.09	1.39	4.15	1.86

Data Source: Ace Equity

So, is this just a mere coincidence?

Unfortunately, no.

Private banks have stricter lending norms and conditions. They are also more efficiently run.

Meanwhile, PSUs have higher NPAs due to their liberal credit policies, loose terms and conditions of loans, deficiencies in credit sanctions and disbursement of loans.

However, this is expected to change going forward as the government plans to clean up the books of these banks.

With unpaid corporate loans at an all-time high in India, the government has set up a bad bank to resolve such loans, paving the way for a major clean-up of the banking system.

The new institution will take over bad loans from commercial banks amounting to Rs 2 bn, a quarter of the total stressed loans in the country.

While there is no direct capital infusion by the government, it has mobilised capital from eight public sector banks (PSBs) - Canara Bank, Bank of Baroda, Punjab National Bank, Bank of India, Bank of Maharashtra, SBI, Union Bank of India, and Indian Bank.

The proposed bad bank has received all regulatory approvals, and lenders plan to transfer at least Rs 500 bn of toxic assets to it by 31 March 2022.

How this bad bank pans out remains to be seen. Meanwhile, stay tuned for more updates from this space.

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