Former Reserve Bank of India (RBI) deputy governor Subir Gokarn compared banks’ bad loans or the non-performing assets (NPAs) with cancer—if not treated early, the patient would die. RBI’s current deputy governor Viral Acharya has said a bank not keeping adequate capital to absorb losses arising out of bad loans resembles a person who has slipped off the terrace of a skyscraper to fall and die.

Looking at the NPAs, the closest simile that comes to my mind is icebergs or the pieces of ice that are formed on land and float in an ocean or lake. They come in all shapes and sizes—from ice-cube-sized chunks to ice islands (the size of a small country) that can wreck a ship. Who can forget the RMS Titanic, the British passenger liner that sank in the North Atlantic near Newfoundland in the early hours of 15 April 1912, killing 1,517 of its 2,223 passengers and crew after it collided with an iceberg?

When chunks of ice calve or break off from glaciers, a large iceberg is born. They travel with ocean currents, sometimes smashing up against the shore or getting caught in shallow waters. About 90% of an iceberg is below the surface of the water. As the density of pure ice is about 920kg/m (and that of seawater about 1,025kg/m), typically one-tenth of the volume of an iceberg is above water. The shape of the underwater portion is difficult to judge by looking at the portion above the surface.

This is what makes me compare banks’ NPAs with icebergs. Rarely do we know what kind of damage they can inflict on a bank. It has been two years since the Indian central bank introduced the so-called asset quality review, or AQR, to figure out how bad the NPA scenario in Indian banks was, but we still don’t know whether the worst is behind us.

In the September quarter of fiscal year 2018, nine of India’s 21 state-owned banks have more than 15% gross bad assets. IDBI Bank Ltd continues to top the list with almost one-fourth of its loans turning bad (24.98%). In the June quarter, it was 24.11% and in September 13.5%. In September 2015, just before the AQR, IDBI Bank’s bad loans were 6.92%. In the two years from September 2015 to September 2017, IDBI Bank’s bad loans have risen three-and-a-half times.

Under the AQR, the banks were asked to clean up their balance sheets in six quarters between December 2015 and March 2017. What we had seen in September 2015 was just the proverbial tip of the iceberg. This is true for most Indian public sector banks. Indian Overseas Bank now has 22.73% bad loans, followed by Uco Bank (18.74%), United Bank of India (18.8%), Bank of Maharashtra (18.54%), Central Bank of India (17.27%), Dena Bank (17.23%), Oriental Bank of Commerce (16.3%) and Corporation Bank (15.28%).

Indian Bank has the lowest bad assets (6.67%), followed by Vijaya Bank (7.06%). Only two other banks had less than 10% gross NPAs in September 2017. They are Syndicate Bank (9.39%) and State Bank of India, the nation’s largest lender (9.83%).

After making provisions or setting aside money for bad loans, six government-owned banks have more than 10% net NPAs. Barring the Chennai-based Indian Bank (3.41%) and Vijaya Bank (4.86%), none of the banks in this pack has less than 5% net NPAs. Three banks which have more than 5% but less than 6% net NPAs are Bank of Baroda, State Bank of India and Syndicate Bank.

Among their private peers, Jammu and Kashmir Bank Ltd continues to remain the worst-affected bank by bad loans with a 10.87% gross NPAs. ICICI Bank Ltd’s gross NPAs are 7.87% and Axis Bank Ltd’s, 5.9%. After provisions, Jammu and Kashmir Bank’s net NPAs are 4.76%, ICICI Bank’s 4.43% and Axis Bank’s 3.12%. In past two years, Axis Bank’s gross NPAs have grown more than four times in percentage terms and that of ICICI Bank, little more than doubled.

Overall, the private banks have made Rs11,845 crore provisions in the September quarter, 34% higher than what they had provided for in the June quarter but 14% less than what they had provided for in September 2016. In case of public sector banks, provisioning in the September quarter over the June quarter is 46% higher. Over the year-ago period, it is higher by 44%.

The weak growth in interest income continues to remain a cause for concern. In the September quarter, the public sector banks’ interest income has risen 8% over the June quarter and 3.5% over September 2016. Clearly, their loan growth is anaemic. At 3.21% growth, private banks’ loan too grew tardily over the June quarter but over the September 2016 quarter, their net interest income has grown 15%. Unless they grow their loan book, the banks cannot earn enough to provide for bad loans and make profits. They are caught in a vicious cycle—the loan book is not growing for fear of accumulating more bad loans and unless the cycle is broken they cannot make enough profits.

The so-called other income, which includes income from trading in bonds or treasury income, for the private banks, rose 7.3% in September over June quarter but dropped 13% from the last September. This is due to the rise in bond yields and drop in prices. In contrast, public sector banks have fared well with their other income rising 14% in the September quarter over June and 27% over last September. As the bond yields have been rising on uncertainty over the government’s ability to stick to the fiscal deficit target (3.2%) for 2018 and inflation going up, banks’ other income will come under more pressure in the second half of the fiscal year.

Overall, the operating profit of all listed Indian banks have risen 13% in the September quarter over last year and 22.25% over June but after setting aside money for bad loans and taxes, the collective net profit dropped by 38% over the previous September quarter and 43% over June quarter. While private banks as a group made a Rs10,632 crore net profit (vs Rs9,876 crore in September 2016 and Rs11,445 crore in June 2017), as a group the public sector banks have posted a Rs4,284 crore loss in the September quarter (vs Rs311 crore profit in September and Rs307 crore loss in June). Eleven of 21 public sector banks have been in the red in the September quarter. In contrast, all private banks have made profits in the September quarter.

When an iceberg reaches warm waters, the new climate attacks it from all sides. On the iceberg surface, warm air melts snow and ice into pools called “melt ponds" that can trickle through the iceberg and widen cracks. How many banks are pouring warm waters over their NPA icebergs?

After the Titanic sank, the United States and 12 other countries formed the International Ice Patrol to warn ships of icebergs in the North Atlantic. It uses aeroplanes and radars to track icebergs that float into major shipping lanes. The US National Ice Center, set up in 1994, uses satellite data to monitor icebergs near Antarctica. However, it only tracks icebergs larger than 500 square metres (5,400 square feet). Icebergs generally range from 1 to 75 metres above the sea level and weigh 100,000 to 200,000 tonnes. Indian banks need to track the bad loans with meticulous care and resolve them if they want to survive.

A few of them have started showing some positive signs. For instance, Bank of Baroda’s (BoB) gross bad loans as a percentage of the loan book dropped to 11.16% for the September quarter from 11.4% in the June quarter and 11.35% a year ago. State Bank of India (SBI) too reported a drop in its bad loan ratios and a sharp fall in fresh slippages sequentially. Its gross NPAs slipped to 9.83% for the second quarter from 9.97% in the previous quarter.

Both the banks have also raised their provision coverage. For BoB, provisions rose 13% from a year ago and provision coverage ratio improved to 57.73%. It has provided Rs162.94 crore towards the stressed accounts referred to under the Insolvency and Bankruptcy Code and reported a drop in fresh slippages to Rs2,586 crore, 50% of what it had reported in the June quarter. For SBI, fresh slippages fell to Rs9,026 crore from Rs26,249 crore in the previous quarter. It has raised provisions by 27% and provided more than 50% for all the stressed accounts, including those referred for bankruptcy proceedings under the insolvency code.

Punjab National Bank (PNB) too has been able to bring down fresh slippages to Rs8,449 crore in the September quarter from Rs11,245 crore a year back. Its provision coverage ratio is 59.23%, higher than 53.32% a year back.

While SBI’s loan book barely grew, PNB has reported 8% and Bank of Baroda 11% growth in advances. If that’s good news, the bad news is BoB’s write-offs for the quarter were eight times those of the same period last year; SBI too has written off Rs9,258 crore.

IDBI Bank, the worst-affected by bad loans, has shown improvement on many counts. Its net interest income has gone up by 18% in September over June and 3.6% over September, 2016. The hefty rise in operating profits, improvement in net interest margin, reduction in fresh slippages, and rise in recovery of bad loans and the low-cost current and savings accounts inspire hope that its new boss M.K. Jain is up to the task.

Most bankers claim that they have already recognized their bad assets and the process to resolve them has already started. One hopes this is true and we won’t see any Titanic sinking.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His latest book From Lehman to Demonetization: A Decade of Disruptions, Reforms and Misadventures will be released on 6 December. His Twitter handle is @tamalbandyo.

Comments are welcome at bankerstrust@livemint.com.

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