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7 things to know about Bank’s recovery
We are almost done with the quarterly results season. Most leading public sector banks have released their financial results. And the market reaction has been optimistic. This positive reaction is even more eventful considering the tumultuous performance banks have had in the past few quarters. Bad loans have worried every banker, investor, analyst and the even the RBI. But this quarter, banks announced a decrease in bad loans and slippages, which caused investors to cheer. However, there’s more to the story.
Here are 7 things you need to know about Bank’s recovery.
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Recovery in earnings
Numbers reported indicate that banks are on the path of recovery, as per a Kotak Institutional Equities report. The Profit after Tax (PAT) grew by as much as 86% year-on-year for banks, the report said. This was supplemented by a 17% revenue growth and a 3% decrease in provisions, the money banks set aside to fund bad loans. A fall in provisions means the banks expect fewer loans to turn bad.
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Net Interest Income growth
After reporting a loss in the July-September quarter, public-sector banks moved back to profits in the latest quarter ended December 2016. They witnessed a 6% growth in Net Interest Income (NII) from the previous year. On the other hand, private banks witnessed a 12% YoY growth in NII, the Kotak Institutional Equities report said. NII is one of the most important indicators of profitability for banks. It measures the difference in interest paid on deposits and interest earned through loans. So, the larger the NII, the more a bank earns from its loans. This is good news for investors.
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Basic rules of corporate governance
The impact of demonetization can be seen clearly in the strong growth in deposits for both public and private banks. For public banks, the deposits grew by 12% YoY in the December quarter. This is faster than the 5% growth in the previous quarter to September 2016. For private banks, the growth was stable at 18%.
The Current and Savings Account (CASA) ratio too improved by around 400 basis points or 4%. The largest improvement in CASA came from public banks. A high CASA ratio means banks can get cheaper funds. The lower the cost, the higher are the profits. -
More needs to be done
Despite this, a lot more needs to be done by banks to propel the growth story. For the past few months, revenue growth has been really struggling with weak loan growth. Impaired loans increased by 0.3% to 7.5% from the previous quarter. A loan is recognized as an impaired loan when the bank is unable to collect the principal and/or interest in accordance with the loan’s contractual terms. An increase in impaired loans has a negative impact on the bank’s profitability.
This has put pressure on banks’ Net Interest Margin (NIM). This is the proportion of the net interest income—the difference between the interest income earned by banks and the interest paid out to depositors—to its total assets. It is equivalent to a company’s profit margin. Higher the NIM, greater is the profitability of banks. However, this value is expected to decrease by 0.15-0.2% over the next financial year, according to a report by India Ratings and Research. -
Asset Quality Review
Since the initiation of Asset Quality Review of banks by the RBI, a lot of information about Non-Performing Assets has been revealed. Around 17% of the loans offered by PSU banks are non-performing, restructured or written off. While the problem has been humongous, little has been done to resolve the underlying problems, according to Dr. Viral Acharya, the Deputy Governor of the RBI.
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Suggestions by RBI
Dr. Viral Acharya suggested that banks should recognise losses in a timely manner. At the moment, this kind of market discipline is not present in many of the Indian banks, he said. In addition, he has also suggested changes regarding the role of the government in footing bank losses. The government is a major shareholder of PSU banks. This results in a situation where it runs the risk of covering the entire loss faced by banks. The deputy governor suggests that private shareholders of banks should also chip in whenever possible.
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Merger of PSUs
Consolidation of the numerable public banks into fewer healthier banks is the right way to go forward, as per the RBI deputy governor. There are a lot of PSU banks that have been underperforming for a long period of time. A merger would be a good opportunity to remove management responsibility from those who have been underperforming until now, he said.
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Rs. 1 lakh Crore
This is the amount of bad loans afflicting the State Bank of India, the biggest public sector bank in the country, according to a report by The Hindu. This value is nearly 1/5th of India’s entire fiscal deficit—the amount by which the government spends more than it earns.
