Bank NPAs: PSUs lead provisioning

Non Performing Assets (NPAs) are a measure of the quality of assets of a bank. The ratio of Net NPAs to net advances assumes a very large importance in judging the bank’s ability to manage the quality of its assets. In this respect Indian banks have shown a mixed trend over the years.

Nationalized banks (including SBI and its subsidiaries), popularly known as public sector banks, have shown an improving trend as far as net NPAs/net advances ratio is concerned. This is an indication that in recent years these banks have managed their NPAs well by increasing provisioning as well as introducing stricter norms for credit assessment. SBI and its subsidiaries have also shown an improvement in their asset quality as shown by the fall in their net NPAs/net advances ratio.

The graphs indicate that the growth in provisioning has been more prominent in the last three years. Higher treasury income due to gains made from sale of G-Sec portfolio has helped these banks to significantly raise their provisioning levels without affecting profit growth in a significant manner. Portfolio gains have been mainly due to falling interest rates. Falling interest rates have led to fall in yields of G-Secs resulting in a rise in prices of these securities.

Among private sector banks the trend is however not too encouraging. Infact, private sector banks have seen their net NPAs/net advances ratio decline over the years. While the ratio is still much lower than their public sector peers, the increase in the ratio for these banks indicates a gradual maturing of these banks in the country. When a bank starts its operations, its NPA levels are low, but as the bank ages, its NPAs mount and thus the increase in the ratio. In the next 3-5 years we could witness a stabilization of this ratio for these banks.

For foreign banks that are operating in the country, the trend has been the same as private sector banks. But the rise in the net NPAs/net advances ratio is at a higher rate compared to their private sector peers. Another reason for the rise in NPAs could be due to the fact that banks had reasonably large exposure to the stock markets. In the last 2-3 years the poor performance of the stock markets has led to erosion in the value of assets for these banks.

While the NPA levels of Indian public sector banks has been falling, the provisioning by these banks for NPAs is still low compared to its international peers. The average provisioning coverage among Indian PSU banks is near 50% compared to over 100% in international banks. But one thing that is clear from the study is the fact that Indian PSU banks are certainly catching up with their private sector peers. Having said that, we must also emphasise that higher provisioning has been in part due to robust treasury gains. The bank’s resolve for maintaining asset quality will be tested once the interest rates stabilize and treasury gains no longer significantly aid provisioning.