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The PSB debacle continues, more to get into PCA but expect no real solution

In one of our earlier article, we highlighted that nearly 75% PSB had breached the RBI PCA threshold on one or multiple criteria. It was based on Dec/ Q3 FY17 data. Has the situation improved or have gone worse with FY17 closure? Unfortunately, the initial prognosis do-not seem good.

  1. IDBI moves to RED zone (level 3 breach in NNPA- > 12% & level 1 in ROA: 2 consecutive years negative ROA)
  2. IOB continues to be in RED zone with Level 3 breach in NNPA and Level 2 breach in ROA (3 consecutive years in negative ROA). CRAR is also near breach level
  3. CBI deteriorates from YELLOW to BROWN Zone (courtesy NNPA level 2 breach-> 9%, while ROA is in level 1 breach)
  4. A few are seeing worsening situation though overall PCA levels are maintained at earlier level.
    1. E.g. Allahabad bank NNPA at 8.92% is nearing 9% (level 2 breach) though ROA for FY17 at -0.13 is better than last year (-0.33)
    2. Dena bank NNPA worsens to 10.66% and so is ROA. FY17 ROA at -0.67 is not healthy. It has already put exposure to Videocon group in ‘bad loan’ category
    3. Bank of Maharashtra NNPA at 11.76% inches closer to threshold 3 level of 12%. It also hit negative ROA ending up at -0.86%
  5. OBC & PNB provides a very small silver lining with NNPA improving from Level 2 breach to level 1 breach status (>= 6 < 9 % NNPA)
  6. Among private banks, ICICI stands out with worsened NNPA

Now consider these facts:

  1. RCOM with a total debt of INR 42000 crore, ended up at 966 cr loss in Q4 FY17. Over 10 banks have ‘red flagged’ RCOM loans. Overall telecom industry debt at 8 lakh cr and is at risk considering the disruption in the Telco ecosystem
  2. Videocon industries has exposure to the tune of INR 45000 crore to banks of which Dena bank has already classified its exposure of INR 520 crore to ‘bad loan’ status
  3. Bank’s effort to sale sprawling Kingfisher bungalow in prime Mumbai land fails for 3rd time in a row despite significant reduction of reserved price.

The rising chances of more loan crossing into the ‘bad loan’ category and bank’s inability to make much recovery only makes the crisis looming at the horizon

3 red flags worry us at this point of time:

  1. With GDP growth, slower than expected (at 6.1% in JFM, it is at lowest of last 2 years and worse than China’s growth of 6.9%) and hence any economic recovery looks bleak. Employment growth remains a concern with stagnation & automation creating a double whammy!
  2. Sec 35AA/AB: new ordinance failing to enthuse many. Click here for more…
  3. The effectiveness of PCA to put the banks back in order is questionable (earlier cases have seen situation worsening e.g. IDBI etc). JLF also seems to be a slow moving ineffective proposition

There does not seem to be much off choice for the Government. The malaise is deep rooted in a few of these banks. There must be some major strategic decision to be taken by the GOI to take the bull by the horn. Incremental, stop gap bandages cannot plug this deep wound which is asking for a surgery.

Consolidation in the PSB sector has been under discussion but things are not moving here also. There is a classical chicken & egg story here. The GOI wants the situation to improve before the merger/ stake sale decision is taken while without that in place, situation may only get worse. Obviously, the only panacea to this is a drastic improvement in economy and some of the badly hit industry sectors.

Once the dust settles, the next big question is that ‘what is needed to ensure that this situation does not repeat itself in next 3-5 years?’

Till then fingers crossed…. Will the GOI unleash the ‘Brahmastra’? No one wants it but that may be overdue before situation worsens towards a systemic crisis!

List of banks with their PCA threshold status in a few key parameters (capital, profitability, asset performance)







Individual banks’ RBI statutory quarterly financial report

RBI for PCA norms

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