Doubly damaging

Vaulting NPAs not only impair public sector banks’ balance sheets but also undermine financial inclusion goals

By: Express News Service | Published:February 11, 2016 12:00 am

On the face of it, no major bank, state-owned or private, has escaped the non-performing assets crisis unfolding in the country. The latest addition to the list is the public-sector giant, Punjab National Bank. On Tuesday, the bank announced that its gross NPAs in the third quarter of the current fiscal increased to Rs 34,338 crore, a sharp rise from Rs 22,211 crore last year. As a result, the PNB had to increase provisioning towards NPAs to Rs 3,775 crore for Q3, up from Rs 1,467 crore in the same quarter a year ago. Eventually, the slippage due to NPAs resulted in the PNB’s net profits falling 93.4 per cent to Rs 51 crore in the October-December quarter. But the PNB was not alone. Two more public-sector banks — Allahabad Bank and Dena Bank — reported a combined loss of Rs 1,100 crore just for the December quarter. Even private-sector banks are getting hit due to increasing NPAs but there is a difference between how the NPA-induced pain in the banking sector affects public-sector and private-sector banks.

According to an analysis by the P.J. Nayak Committee report on the governance of bank boards in 2014, the market share of PSBs in India has fallen from 80.2 per cent in 2000 to 73 per cent in 2013. It calculated that, given this trend, PSBs will further relinquish market share and be reduced to just 63.2 per cent by 2025. This, the committee found, is due to several reasons. Irrespective of which variable one looks at — return on assets, average net interest margin, net profit per employee or the ratio of staff costs to operating expenses — PSBs massively lag behind private-sector banks. This is evident in the scale of the NPA crisis, too.

In its bid to give primacy to the goal of financial inclusion, the Modi government unveiled a flurry of schemes such as the Jan Dhan Yojana, the Atal Pension Yojana and the Suraksha Bima Yojana — PSBs were expected to be the main vehicles to drive this change. At first, the hurried pace at which many of these schemes were pushed was a cause for concern. But now, as PSBs declare the true extent of stressed assets on their balance-sheets, it is becoming clear that they will find it difficult to push financial inclusion, which requires banks to put up with significant costs upfront. This underlines the urgency to reform PSBs and ensure they follow prudential norms. Failure to do so will adversely affect the goal of financial inclusion.

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