Trouble at the bank

The State Bank of India numbers were a disappointment for the market, but they did not surprise. The trend in banking results this quarter, especially that of public sector banks, had created an accurate expectation of what the SBI numbers would look like. Right from last year, when Pratip Chaudhuri took over as chairman, the SBI has been frontloading provisioning for bad loans. The attempt has been to minimise the impact of bad loans as quickly as possible from its balance sheet. That this is still not over is evident from Friday's second quarter results. The overhang of new bad debts persists for India's largest bank. The key takeaway from the Friday numbers: net interest income, the difference between the cost of funds raised and earned, has declined by one per cent, quarter on quarter. The trigger is the bad news from non-performing assets (NPA). The banks' gross NPA has increased from 5 to 5.2 per cent as has net NPA. To provide for these bad debts and restructured ones too, the bank needs to set aside more capital. But for the second quarter, the provision coverage ratio has declined as the bank has been able to provide less than the required sum needed since its operating expenses have grown by 9 per cent. The SBI has, therefore, made a compromise by showing a profit after tax in line with the estimates of analysts at Rs 36.9 billion, but at the cost of making lower provisioning for the bad loans.

The pressure on the SBI and other leading public sector banks, including the PNB and Canara Bank, is the result of the huge loans these banks have been nudged to make in the infrastructure sector in the past few years amid a sliding domestic and global economy. They have had little chance of selling these loans to long-term infra financiers who are still being set up. Those that are operational have not helped as they have been keen to buy out the profitable projects from the banks' balance sheet, keeping the dud ones on their books. As more sectors of the Indian economy have clouded over, the pressure on the banks has intensified.

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