India’s worst performing banks on this all-important ratio

A high NPA indicates a poorly performing bank.

The December quarter of 2021 is a good quarter for Bank PSU. As the economy recovered, the credit growth of these banks improved and NPA decreased.

However, a closer look Balance sheet shows that debt forgiveness is an important way to reduce bad debts.

While many banks have seen their write-off value decline on a quarterly basis, the number is still growing.

This is not surprising as PSU banks are notorious for having high numbers of stressed or underperforming assets (NPAs) on their balance sheets.

What is NPA?

A non-performing asset (NPA) is a loan or advance for which principal or interest payments are past due by 90 days.

They are of two types – total NPA and net NPA. Gross NPA refers to the total amount of debt a bank has while net NPA is the total amount of stressed assets the bank has after accounting for provisions.

A high NPA indicates a bank is underperforming because they place a significant burden on the bank.

A significant number of NPAs over time can indicate a bank’s financial position is at risk.

Here are five banks with consistently high NPAs.

#1 Bank IDBI

Leading the way with a 5-year average compound NPA of 26.2 is IDBI Bank. This means that for every Rs 100 loan provided by IDBI Bank, Rs 26.2 is not collected by the bank.

The bank’s 5-year average net NPA is at 9.23.

IDBI Bank has suffered huge losses in recent years due to the company’s NPA. Over the past seven years, the bank has written off bad debts worth Rs 46,000 crore.

For fiscal year 2021, IDBI Bank’s gross NPA is 27.53 while the bank’s net NPA is 1.97.

The bank has focused on reducing NPA through withdrawals and write-offs but NPA remains unchanged due to slow increase in advances.

Bank management said it expected a 4-5% reduction in NPA with growth in advances. The transfer of bad assets to the government’s bad credit bank will further reduce the NPA by 5 – 6%.

The bank is no longer subject to strict lending restrictions imposed by the Reserve Bank of India (RBI) in May 2017.

The private sector lender has been removed from the framework of prompt corrective action (PCA).

PCA is a supervisory tool initiated to help improve the overall performance of banks.

#2 Indian Overseas Bank (IOB)

Coming in second on our list is Offshore Bank of India with a 5-year average NPA of 19.22 and a 5-year average net NPA of 9.83.

The bank’s high NPA is also due to the NPA in the corporate segment. About 40% of all business loans that banks offer are NPAs.

Currently, only 44% of corporate loans are rated A or higher while the remaining 56% are rated BBB or below by credit rating agencies.

As of March 2021, Offshore Bank of India’s gross NPA was lower at 11.69 while net NPA fell to 3.58. The bank has attempted to reduce the NPA using centralized and multi-level recovery initiatives.

RBI has also taken the Overseas Bank of India (IOB) out of the PCA framework in terms of improving its financial and credit profile.

The decision gives the Chennai-based bank more freedom in lending, especially to corporations and network developers, subject to regulatory norms.

IOB was included in PCA in October 2015 due to its high NPA and negative Return on Assets (RoA). It was forbidden to raise risk-weighted assets.

#3 Central Bank of India

Coming in third on our list is the Central Bank of India with a 5-year average compound NPA of 18.81 and a 5-year net NPA of 8.49.

Like the two PSU banks above, the Central Bank’s high NPA is also due to NPA in the corporate segment.

35% of total bank advances are corporate advances, followed by retail (27%), MSME (20%) and agriculture (18%).

In fiscal year 2021, the Central Bank’s total NPA is lower at 16.55 while its net NPA is 5.77.

The bank is expecting to settle certain large NPA accounts through NCLT under the Bankruptcy and Bankruptcy Code (IBC) and externally during the current financial year. The company plans to continue to focus on NPA recovery and asset quality improvement during the year.

The Central Bank of India is the last remaining public sector lender under the RBI PCA framework. However, it could see such restrictions being lifted soon.

The bank meets all the parameters for exiting the PCA framework and the RBI will remove it from the PCA shortly after the end of this financial year.

#4 UCO Bank

Fourth on our list, is UCO Bank.

The bank has a 5-year average compound NPA of 18.62 and a 5-year net NPA of 8.23.

Its loan book shows exposure to various industries such as infrastructure (22%), NBFC (20%), base metals (12%), construction (4%), processing food (4%), textiles (3%), engineering (7%) and others.

Retail advances accounted for 26% of total bank advances, followed by MSMEs (26%), corporate and other banks (26%), and agriculture (22%).

UBO Bank’s asset quality, although poor, has improved over the past few years. The bank’s total NPA fell to 9.59 in fiscal 2021 while net NPA was lower at 3.94.

The improvement in asset quality is due to improved resilience, account upgrades, and write-offs.

Currently, 55% of the bank’s loan books are rated A or above by credit rating agencies while 32% are rated BBB or below. 13% of the advance is not rated.

The Bank has been subject to Timely Corrective Action (PCA) restrictions since March 2017.

In September 2021, RBI removed the bank from PCA due to improving asset quality, capital position and earnings profile.

#5 Punjab National Bank

Last on our list is the National Bank of Punjab.

The bank has a 5-year average compound NPA of 14.95 and a 5-year average net NPA of 7.42.

The company’s NPA also plagued the PNB. Advances to businesses accounted for 48% of total loans, followed by retail (18%), MSME (18%) and agriculture (16%).

The bank’s business loan book covers a wide range of industries. Industries with the highest exposure include energy (22%), roads & ports (15%), base metals (15%), telecommunications (9%), textiles (6%), chemical (5%) and other industries.

For fiscal year 2021, PNB’s gross NPA is 14.12 while its net NPA is 5.73. The bank is targeting a reduction in its NPA for the ongoing financial year based on its recovery plan.

The lender is expecting a recovery of Rs 5,000 crore in the ongoing quarter from cases being resolved through the National Company Law Court (NCLT) and otherwise, as well as small accounts.

Of these, it is expected to recover Rs 1,000 crore from NCLT cases and Rs 2,300 crore from non-NCLT cases. From small accounts, the bank is expecting a recovery of Rs 2,000 crore, bringing the overall recovery to Rs 5,000 crore.

PSU Bank vs Private Bank – Asset quality

As you can see, all of the above banks are PSU banks. In fact, the next five banks with the highest NPAs are also PSUs.

Do not believe me? Watch …

Indian banks with highest NPA

Data source: Ace Equity

Private bankOn the other hand, has demonstrated superior asset quality to the above PSUs over the past five years.

See the table below.

The 5-year average gross NPA ratio and the 5-year average net NPA ratio are much lower than those of PSU banks. They are also far more profitable and lead their public sector counterparts in most other metrics.

NPA Ratio of Indian Private Banks

Data source: Ace Equity

So is this just a mere coincidence?

Unfortunately there isn’t.

Private banks have stricter lending standards and conditions. They are also run more efficiently.

Meanwhile, PSUs have higher NPAs due to liberal credit policies, lax lending terms and conditions, lack of credit sanctions and loan disbursement.

However, this is expected to change in the future as the government plans to clean up the books of these banks.

With outstanding business loans at an all-time high in India, the government has set up a bad bank to settle those loans, paving the way for a massive purge of the banking system. .

The new institution will accept bad loans from commercial banks up to Rs 200 crore, a quarter of all domestic stress loans.

While not having direct government funding, it has raised funds from eight public sector banks (PSBs) – Canara Bank, Baroda Bank, Punjab National Bank, Bank of India, Maharashtra Bank , SBI, Union Bank of India, and Bank of India.

The proposed bad bank has received all regulatory approvals and the lenders plan to transfer at least Rs 50,000 crore of malicious assets to it by March 31, 2022.

How this bad bank overcomes remains to be seen. Meanwhile, stay tuned for more updates from this space.

Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

(This article is provided by Equitymaster.com)