SBI, PNB, other Indian banks see sharp fall in NPAs; these reasons to thank for improved asset quality

India’s largest PSU banks — State bank of India (SBI) and Punjab national bank (PNB) — saw a significant fall in non-performing assets in the fiscal’s second quarter. SBI, which accounts for the highest share of PSU Banks’ GNPAs at 20 per cent, reported the highest asset quality improvement in the second quarter. Its GNPA ratio fell to 5.3 per cent in September 2020, compared to 7.2 per cent in the same month last year. Another large PSU bank, PNB that accounts for 16 per cent share in overall PSU banks’ GNPAs, saw a fall in NPAs at 13.4 per cent in September 2020, compared to 16.8 per cent in the last year. 

The improvement in asset quality has majorly been due to recoveries and higher write-offs by the multiple banks. SBI alone had recoveries to the tune of Rs 4,038 crores and has written off loans worth Rs 5,617 crores, according to Care Ratings. Among other PSU banks, NPAs of Bank of India fell from 16.31 per cent to 13.79 per cent on year in Q2; Bank of Maharashtra (16.86 per cent to 8.81 per cent); Indian Overseas Bank (20 per cent to 13.04 per cent); and NPAs fof UCO Bank fell from 21.87 per cent to 11.62 per cent on-year in Q2.

The net NPAs of all banks also shrank significantly to Rs 2.1 lakh crores in Q2 FY21 from Rs 4.5 lakh crores in Q2 FY19, reflecting an increase in provision coverage ratio (PCR). The aggregate provision coverage ratio of all banks rose to 80 per cent at the end of Q2, from 68.9 per cent in the previous year. The GNPA ratio of scheduled commercial banks further improved to 7.7 per cent in the quarter ended September 2020, against 9.3 per cent in the year-ago period, and 8.2 per cent in the current fiscal’s first quarter, which was largely driven by PSU banks. 

The aggregate interest income recorded a marginal increase of 0.8 per cent during Q2 due to subdued credit offtake, coupled with falling interest rates. Additionally, the falling deposit interest rate in the quarter also led to a decline in interest expense of banks by 8 per cent, compared with 9.4 per cent growth in the year-ago period.

It is to be noted that the Supreme Court has ordered all banks to not classify Covid-19 related defaults as NPAs until further notice, or else the NPAs would have been higher in the second quarter. As per disclosures by banks studied by the rating agency, the Gross NPAs would have been around 0.5 – 0.6 per cent higher if these accounts been classified as NPAs. Meanwhile, IDBI Bank and Lakshmi Vilas Bank had the highest NPA ratios of around 25 per cent in the second quarter.