Banks ended FY22 on a strong note, not so much because business was brisk but due to significantly lower provisioning for bad assets. The fall in provisioning was a fairly steep 27-28% for both private sector lenders and state-owned banks. Business was rather dull last year, with banks choosing to stay risk-averse after a few tumultuous years of non-performing assets (NPAs) rising to alarming levels. Some of this was inevitable because the pandemic-induced disruption impacted thousands of companies adversely, especially the smaller units. This is coming to light now. As Shritama Bose recently reported in this paper, most large lenders saw an increase in fresh bad loans in the three months to March, over the December 2021 quarter. For a clutch of 17 banks, the slippages were a fairly high `53,512 crore, about 28% higher than in Q3FY22. To be sure, the jump is partly due to do the Future Retail exposure, which slipped during the quarter. But there was certainly more to it in terms of higher stress in the agriculture, medium- and small-scale industries (MSMEs) and retail segments.
The numbers were skewed due to large slippages at a couple of lenders—Punjab National Bank accounted for about a fifth of the total slippages, while the increase at UCO Bank was a whopping 150%. Nonetheless, the economic recovery has been mixed, with several businesses not yet back to where they were before the pandemic. Thus, it would be imprudent to think the worst is over. A couple of banks have indicated as much, saying they expected more of the smaller accounts to slip in the coming months. To that extent, the asset quality ratios may not be reflecting the stress that may be building up.
It is, therefore, not surprising RBI is telling lenders to be cautious about advances restructured during the pandemic. In its annual report for 2021-22, the banking regulator observed that while the sector might have seen an improvement across many parameters (gross NPAs, for example, stood at 6.9% at the end of September compared to 7.3% in March 2021), there is a need to be watchful of the credit behaviour of the restructured exposures. RBI believes there is the possibility of slippages in sectors more affected by the pandemic and the lockdowns. The warning is timely and should be heeded.
Many government and RBI measures to support businesses that were in trouble have gradually been unwound. However, the units whose accounts were recast may not be fully back in shape. RBI has done well to anticipate insolvencies and prod banks to make adequate provisions. Indeed, the lack of adequate provisioning and the sweeping of toxic exposures under the carpet resulted in the pile-up of NPAs between FY13 and FY16 before the asset quality review was initiated in Q4FY16. Since FY19, the Centre has infused more than `3 trillion into public sector lenders. In the absence of this support, some lenders may have turned insolvent. Banks today have meaningful exposure to MSMEs and sections of the corporate sector badly hit by the pandemic.
Moreover, not all retail loans are secured; banks need to ensure potential stress is well covered. Rating agency Fitch believes while banks have benefited from regulatory-sanctioned deferred recognition of pandemic-driven stress, it may be masking the impaired loan ratios. That is a sad commentary on the provisioning levels of lenders. They must proactively recognise accounts that may be unviable. Shareholders and taxpayers are entitled to transparent balance sheets. Kicking the can down the road helps no one.
