Those who have been hoping that the worst is behind the Indian banking industry are a disappointed lot. Going by the Reserve Bank of India’s (RBI) June Financial Stability Report, the risks to the banking industry’s stability have worsened. It warns that the banking system’s gross bad loan ratio will rise to 10.2% of the total loan book in March 2018 from 9.6% in March 2017. The ratio may even jump to 11.2%. For public sector banks, the gross bad loan ratio could be as much as 14.2% by March 2018, from 11.4%.

The worsening of asset quality will hit banks’ profitability and erode capital, thereby curbing their ability to give loans to the borrowers. Without naming the banks, the report points out that the capital adequacy ratio—or capital as a percentage of a bank’s risk-weighted loan exposures —of six banks is likely to fall below 9% in a severe macro stress scenario, pulling down the industry’s capital adequacy ratio from 13.3% in March 2017 to 11.2% in March 2018.

This is the 15th edition of the report—a biannual reality check of the Indian financial system—in the past seven and a half years. It may not be a bad idea to look at how Indian banks’ health has deteriorated over the past five years, since 2012.

In March 2012, only six state-owned banks had more than 3% gross non-performing assets (NPAs). They were Central Bank of India (4.8%), State Bank of India (4.5%), Uco Bank (3.5%), United Bank of India (3.4%), Oriental Bank of Commerce (3.2%) and Union Bank of India (3%).

Three State Bank of India associates too had more than 3% gross NPAs, but I am not counting them as they got merged with the parent last year.

In five years, by March 2017, gross NPAs of all state-owned banks, barring five, have been in double digits. These five banks are Vijaya Bank (6.6%), State Bank of India (6.9%), Indian Bank (7.5%), Syndicate Bank (8.5%) and Canara Bank (9.6%). Two banks now have more than 20% gross NPAs—Indian Overseas Bank (22.5%) and IDBI Bank Ltd (21.3%) and five, more than 15%. They are Central Bank of India (17.9%), Uco Bank (17.1%), Bank of Maharashtra (16.9%), Dena Bank (16.3%) and United Bank of India (15.5%).

Apart from United Bank of India, which has been consistently showing higher NPAs, all other banks had shown modest growth in bad asset accumulation till March 2015 and a sudden jump in two subsequent years—in 2016 and 2017. This follows the RBI’s asset quality review or AQR conducted in the second half of 2015. The AQR forced the banks to recognize bad assets and set aside money or provide for them in phases till March 2017.

The story of net NPAs also rings the same bell . Between March 2012 and March 2015, it had been a progressive deterioration in asset quality for most public sector banks but the sudden spurt in bad loans happened first in March 2016 and then zoomed in March 2017. Indian Overseas Bank tops the list with 14.1% net NPAs, followed by IDBI Bank (13.2%), Bank of Maharashtra (11.8%), Dena Bank (10.7%), Central Bank of India (10.2%) and United Bank of India (10%).

How have the private banks fared? Here the graph is different—less volatile and some of the banks have either been able to contain their bad assets and even improve the asset quality in the past five years, even as a few have been showing a steady or even a sudden deterioration. For instance, the gross NPAs of Axis Bank Ltd rose from 1.1% of its loan portfolio in 2012 to 1.8% in 2016 before jumping to 5.5% in 2017. For ICICI Bank Ltd, it has been a steady rise—from 3.6% to 8.8% during this period.

On the other hand, Dhanlaxmi Bank, which saw its gross NPAs rising to 7% in 2015, has actually been able to bring it down to 4.8% in 2017. Similarly, DCB Bank Ltd and Federal Bank Ltd have brought down their gross NPAs.

In the pack of private banks, Jammu and Kashmir (J&K) Bank Ltd has the highest gross NPAs at 11.2%.

Last five years’ net NPA graph of private banks is a mirror image of their gross NPAs. For Axis Bank, it rose from 0.3% in 2012 to 0.7% in 2016 and zoomed to 2.3% in 2017. The trajectory for ICICI Bank is 0.7% in 2012, 1% in 2014, 3% in 2016 and 5.5% in 2017. For Dhanlaxmi Bank, after peaking in 2014 (3.8%) it has been progressively coming down (2.6% in 2017). Similarly, DCB Bank’s net NPAs peaked at 1% of its loan book in 2015 and it has managed to contain it at 0.8% in the past two years. For J&K Bank, it has been a progressive deterioration—from 1.6% in 2015 to 3% in 2016 and, finally, 5.5% in 2017.

RBI’s worry for capital is more than justified if one looks at the quantum of net NPAs as a percentage of the banks’ net worth or capital and reserves. Overall, for public sector banks, it was 18% in 2012. Since then, it has risen to 76%. For seven banks, it has been more than 100%. Only two state-owned banks have net NPAs less than 40% of their net worth—Indian Bank (33%) and State Bank of India (37%).

The private banks are much better off than their public sector peers.

For instance, Axis Bank’s net NPAs are just about 15% of its net worth and for ICICI Bank, they are 25%.

Even the most vulnerable among the private banks with the highest level of bad assets, J&K Bank, is in far better shape than all public sector banks, barring two. Its net NPAs are 43% of its net worth.

Even though RBI is pushing the banks hard to fight it out at the insolvency court against large loan defaulters, resolution of bad loans will be a long haul. Meanwhile, most banks need capital. Only then will they be able to resume lending.

(Bankers Trust will not appear next Monday, and will resume from the week after)

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.

His Twitter handle is @tamalbandyo. Respond to this column at tamal.b@livemint.com

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