In April, just a month before Punjab National Bank (PNB) reported a Rs 13,417-crore fourth-quarter net loss — the biggest ever by an Indian lender — the state-run bank’s Managing Director Sunil Mehta declared the “worst is behind us”.
This expression — “the worst is behind us” — has been repeatedly deployed by bank chiefs to assuage both deposit holders and investors, despite steadily rising bad loans. After staying below the Rs 1 lakh-crore mark between FY06 and FY11, gross NPAs of banks surged to cross Rs 1.4 lakh crore by March 2012. Since then, gross NPAs have risen over six times to cross Rs 7.9 lakh crore till March 2017. Yet, bank chiefs kept claiming there was little to worry.
On this count, the heads of the State Bank of India — India’s largest bank that accounts for more than a fifth of the country’s banking assets — are arguably the worst offenders. At least four SBI chiefs have persistently resorted to this assurance over the last eight years.
In February this year, even as SBI, amid increased pressure of stressed assets, reported its first quarterly loss in 17 years for the three months ended December 2017, the bank’s management claimed that the bad loans had topped out. “Stressed assets as a percentage of total loans is coming down. A large chunk is now being recognised as NPAs (Non-Performing Assets). The remaining stress will be taken care of in the March quarter. If you ask whether it has peaked, yes,” said SBI Chairman Rajnish Kumar in a post-results press conference on February 8.
‘The worst is over’, PSU bank chiefs kept saying as NPAs climbed steadily
March quarter, primarily due to a surge in provisions — the second highest quarterly loss figure reported by any bank after PNB’s record Rs 13,417 crore loss reported for the March quarter.
Three years ago, on August 12, 2015, announcing the results for the first quarter of FY16, then SBI chairperson Arundhati Bhattacharya indicated that the worst was behind the bank in terms of large bad loans and that slippages were largely in small businesses. She repeated this on August 13, 2016, at a results conference: “The worst is behind us when it comes to stressed assets. But let me warn you that the recovery will be slow and staggered as all those accounts marked in the watchlist display stress,” Bhattacharya told reporters in Mumbai.
Two-and-a-half years before this, on February 13, 2012, when the bank’s profits grew despite an increase of over Rs 1,300 crore in loan loss provision and an over Rs 800-crore depreciation in investment on account of losses in the equity portfolio, Pratip Chaudhuri, then chairman, asserted that the bank is back on a consistent growth path. Again, that the “worst is over”.
”We think the worst is over with regard to NPAs. NPAs have plateaued. The biggest hit was from one aviation company, which accounted for about Rs 1,200 crore of the NPAs. But we could expect some improvement in the sector following the proposal to allow FDI and direct import of fuel,” Chaudhuri had said at the results press conference in Mumbai.
On May 26, 2010, SBI’s then chief O P Bhatt repeated that the “worst is over” in terms of its rising bad debts, which had then dragged down its net profit by over 30 per cent in the fourth quarter of FY’10. “The worst is over,” chairman O P Bhatt was quoted as having told reporters, when asked about the bank’s NPA levels at the sidelines of an RBI event in Mumbai that day.
In response to a mail sent by The Sunday Express on his statement, Chaudhuri said, “It was a good six years ago. I do not recollect details.”
Chaudhuri, who had launched a big clean-up drive after he took over in April 2011, set aside funds both for bad assets as well as to meet the bank’s pension liabilities. There was a surge in gross and net NPAs over the 10 quarters that Chaudhuri was at the helm, with gross NPAs growing in eight out of 10 quarters and net NPAs in seven of them.
Bhattacharya and Bhatt could not be contacted for comments. A former bank chief, on condition of anonymity, however, said the disclosures not keeping pace with the actual losses can be partly attributed to the Reserve Bank of India progressively tightening the norms for resolution of stressed loans.
In the case of PNB, Mehta’s “the worst is beind us” comment, in an interview to PTI on April 8 this year, echoed what one of his predecessors had claimed nearly four years ago.
In the bank’s FY’14 third quarter earning call on January 31, 2014, then CMD K R Kamath said, “So a stress on an asset quality is directly related to what is happening in an economy and what’s happening in some of these sectors… I have never contributed to a statement saying that we have peaked out on this because again, I say that peaking out is a relative term. Having said that, I would say that we are in control of the situation and you should look forward for a similar performance from us in the coming quarters,” Kamath had said then.
While the regulator’s tightening of norms has had an impact on banks, the declaration of fresh NPAs clearly follows a pattern. “Management transition is the biggest issue with PSU banks. In the past, we have seen banks reporting very good set of numbers by outgoing CMDs (mainly in the last two quarters). The trend reverses when new management is in place. Therefore, we will not extrapolate from the first quarter numbers,” Religare Capital Markets said in a recent research note.
Going forward, it might get more difficult to do so. In the wake of a fresh directive from the Finance Ministry, public sector banks have now been asked to conduct forensic audits on all loan accounts above Rs 50 crore for any possible fraud. After completion of the audits, the banks will prepare details of accounts that could potentially turn into NPAs, which will then be shared with the government and investigative agencies.