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Bruising quarters ahead for Indian state-run banks amid bad debt reclassification


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Bruising quarters ahead for Indian state-run banks amid bad debt reclassification

Indian public sector banks will have to experience a fewmore quarters of pain before they are able to recover from a mountain of baddebt stemming from the Reserve Bank of India's measures to strengthen thebanking system.

Four of the five largest government-run banks reportedlosses for the fiscal year ended March 31, with reporting the steepestloss at 62.04 billion rupees. Meanwhile, India's largest lender, , saw its netincome dip to 122.25 billion rupees from 169.94 billion rupees in theprior-year period.

As the impact of the RBI's asset quality review reverberatesthrough the system, state-run lenders are unlikely to see relief anytime soonand taking more provisions for nonperforming loans will continue to constrainearnings.

"Probably for the immediate one or two quartersprofitability would still be weak, not as weak as in the [fiscal] third andfourth quarters, but still weak," said Amit Pandey, a credit analyst atS&P Global Ratings. "My sense is some of the public sector banks wouldbe showing better profitability next year."

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The steep decline in profitability at public sector lendersfollowed a push by the central bank to clean up their balance sheets. The RBIbegan the review of banks' asset quality in April 2015, after which it askedbanks to properly classify bad loans and take more provisions for such loans.

The RBI gave banks until March 2017 to have "clean andfully provisioned balance sheets," directing them to increase provisioningby 2.5% every quarter to 15% by then, starting in April.

Following the review, banks saw their nonperforming assetsshoot up. The central bank said gross NPAs in the banking sector went up to7.6% of gross advances in March from 5.1% in September 2015.

Among state-run banks, Bank of India reported an NPL ratioof 13.18% for the fiscal year, more than double the 5.39% it reported in theprior year. Punjab NationalBank saw its NPL ratio climb to 12.37% year over year from 6.44% inthe prior-year period.

"Loan growth is not as fast for some of the publicsector banks, so NPL ratios will go up. The pace may not be as sharp as 2015,but at least for one year it should go up," Pandey said.

The RBI expects gross NPAs at banks to rise to 8.5% of totalassets by March 2017 from 7.6% in March under its baseline stress testscenario. Under more adverse conditions, the gross NPA ratio may furtherincrease to 9.3% by March 2017, the central bank said in its financialstability report released June 28.

Public sector banks are not the only ones suffering fromrising bad loans. Their private sector peers also saw NPL ratios increase forthe fiscal year ended March 31, though they are thought to be better equippedto handle the rising bad loan situation.

"The profitability and capitalization of these banksare much higher than what it is for public sector banks so they can absorb someof these credit costs better. They have more retail component, they have ahigher fee component in their earnings," Pandey said. "So I think thepressure is there, it's just that the ability to absorb the pressure is a littlebit more than their public sector peers."

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As painful as things are for lenders, the central bank islooking down the road.

"Pending the change in attitude, which I think willcome as banks turn to unlocking the value in NPAs, we are working with them tosequence the most obvious actions up front. However, the end game is clear toeveryone and bounded. We do not envisage a sequence of [asset qualityreviews]," outgoing RBI Governor Raghuram Rajan said in a February speech.

It is not clear when bad times will come to an end forbanks. Pandey noted that a turnaround for public sector banks is difficult andwill require a combination of factors including fixing up troubled sectors,such as construction and steel; cleaning up banks' books; and improvinggovernance in the public sector banks. Creating a bank board bureau is alsoanother option to help boost banks' performance.

"So I think it's a combination of everything, andeverything has to fall in line to get to a turnaround," he said.

As of July 15, US$1was equivalent to 67.08 Indian rupees.

S&P Global Ratingsand S&P Global Market Intelligence are owned by S&P Global Inc.

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