High NPA ratio proves PSBs did not make enough provisions: RBI

Public sector banks did not make enough provisions as seen from their high net non-performing asset (NPA) ratio of 6.9 per cent (against 2.2 per cent and 0.6 per cent for private sector and foreign banks, respectively) at the end of March 2017, according to a Reserve Bank of India occasional paper.

The median individual bank-wise data suggests that the deterioration in asset quality of public sector banks was much more pronounced vis-à-vis private sector banks or foreign banks, said the paper, ‘Asset Quality and Monetary Transmission in India’.

The gross NPA ratio of public sector banks increased from 3.8 per cent at March-end 2013 to 5.4 per cent at March-end 2015 and further to 12.5 per cent at March-end 2017, while that of private sector banks increased from 1.9 per cent to 2.2 per cent to 3.5 per cent over the same period.

“Banks increased their provision coverage ratio (PCR) – from 40.3 per cent at March-end 2014 to 41.9 per cent in March 2016 and further to 43.5 per cent at March-end 2017; this, however, fell short of the objective to have “clean and fully-provisioned bank balance sheets by March 2017” (Rajan, 2016)”, said the paper.

With provisions and contingencies increasing by 45.2 per cent at the end of 2015-16 (₹2,09,400 crore), net profits shrank by 61.7 per cent.

Provisions and contingencies increased further by ₹2,43,700 crore at the end of 2016-17, reflecting the continued stress in asset quality, said the authors.

The authors elaborated that net NPAs increased to ₹4,33,100 crore (5.3 per cent of net advances) at the end of 2016-17 from ₹3,49,800 crore (4.4 per cent of net advances) a year earlier, reflecting the requirement for further provisioning in the years to come.

The RBI paper observed that a healthy bank with low default risk in its loan portfolio will be able to pass on interest rate changes of the central bank symmetrically on its deposits and loans.

On the other hand, a bank faced with a high level of NPAs – prospective or realised – will seek to build up provisions by loading credit risk premia on its performing loans, thereby pushing up the lending rates and, hence, its net interest margin (NIM).

“In the process, notwithstanding lower funding costs in response to the policy rate cut by the central bank and comfortable liquidity conditions, banks may not reduce their lending rates or may reduce them only partly, thereby impeding monetary transmission.

“Thus, movements in the NIM of banks, among others, could provide an important indication of the effectiveness of monetary transmission.”