State Bank of India chief Arundhati Bhattacharya’s candid comment, to the effect there are few indications that things are looking up, pretty much sums up the near-term prospects for the country’s banking sector. The numbers for Q2FY14 tell only part of the story—net profits have fallen 24% yoy for an aggregate of 37 banks, with SBI’s having dropped 35% yoy. Banks have not just been under pressure from higher yields hitting their bond portfolios, they’re also hurting because a slowing economy has left them with fewer opportunities to lend profitably. Indeed, as the SBI India chairperson observed on Wednesday, there could be more pain ahead, which means both that business could remain dull and that asset quality could deteriorate further. The latter is the bigger worry. The worsening quality of loans may not be reflected immediately in the aggregate non-performing assets (NPAs)—net NPAs as a share of advances have stayed more or less flat at 2.3% compared to Q1FY14—but slippages have increased for several lenders like Union Bank and IDBI Bank.
More pertinently, a huge chunk of loans is being restructured and, therefore, not being classified as NPAs. For instance, while slippages at SBI during the September quarter were sharply lower at R8,365 crore compared to R13,766 crore in Q1FY14, the quantum of loans recast was higher at R8,585 crore compared to R4,384 crore in Q1FY14. Restructured loans at Punjab National Bank are now at 11% of its loan book. What’s worrying is that bankers believe as much as a fifth of their restructured portfolio could turn toxic—between April and September in FY14, approximately R43,273 crore of debt has been recast via the CDR cell route and analysts believe there’s more in the pipeline. Higher delinquencies will mean more capital being used up for the same loan at a time when banks—mainly the state-owned lenders—don’t have enough of it given profits are shrinking. Even those banks that do have the funds to lend seem to be turning increasingly risk-averse in what they perceive to be a difficult environment. Advances in Q2FY14 were up just 12% yoy and some private sector lenders have turned very cautious—the ICICI Bank management, for example, said it was being choosy about its corporate clients. Holding on to expensive capital at a time when quality assets are hard to come by and deposits are becoming costlier is prudent strategy; until there are clear signs the economy is