The State Bank of India (SBI)’s losses of Rs 7,718 crore reported for January-March 2018 quarter highlights the critical issues bogging the Indian banking industry. Losses at the largest Indian bank, SBI, are not limited to just one but two quarters in continuum. This highlights some crucial issues. Firstly, the big balance sheet clean-up by banks continues in right earnest due to pressure from the Reserve Bank of India (RBI) and the Narendra Modi government. Secondly, banks have proved to be resilient after being virtually robbed by politicians that front-ended sweetheart deals for big corporates leading to the build-up of non-performing assets across industrial and services sectors. Thirdly, the losses reported by SBI were second highest after Punjab National Bank (PNB) was besieged by a $2 billion fraud perpetuated by its top officials with Nirav Modi and his family based out of Europe.
PNB’s Rs 13,417 crore losses in the last quarter of 2017-18 are perhaps the highest in India’s banking history. Canara Bank and Allahabad Bank’s losses were also huge at Rs 4,860 crore and Rs 3,510 crore respectively. In all, eleven banks seem to have struggled with non-performing assets that have totalled over Rs 8,00,000 crore in the entire banking industry. Higher provisioning to meet the contingent liabilities seem to be the sole reason for the losses reported by various banks. At one level, banks boards have become more realistic and responsible while reporting their strengths and weaknesses to shareholders, partners, associates and also customers.
Low trading income, mark down in asset values due to hardening of bond yields, higher outgo on wages and gratuity have been identified as other causative factors for SBI’s losses. Given the iconic status of SBI in the Indian context, the bank reporting losses for two consecutive quarters would definitely shake up the confidence of ordinary investors. A steep fall in operating profits and net interest income coupled with a huge increase in interest expenses against deposits may have been flagged as key components leading to SBI’s losses. Already, SBI has provided for bad loans worth Rs 47,000 crore during the last two quarters and braced up to sell 49 per cent stake in SBI Caps as part of its sprucing up act.
This is more or less the story with many state-run, private and foreign banks notwithstanding the Rs 2,11,000 crore bailout plan announced by finance minister Arun Jaitley in the budget for this fiscal. While the time is ripe for serious mergers and acquisitions coupled with restructuring most banks, the government will have to hasten to reduce its holding to 33 per cent for wider capital mobilisation by domestic and foreign players. A wider shareholding base would also lead to reforms in governance, make boards of directors accountable and make banks more profitable enterprises.
Reforms in banks should aim at strengthening their ability to absorb capital losses, grow their loans portfolio and improve profitability without looking for bailout funds from the government. However, not everything is lost for banks or their shareholders. For instance, several stakeholders would have been surprised. Otherwise, how would one explain the rally witnessed in the SBI counter in the last two days after losses were declared. Firstly, the shareholders may have expected a turnaround in NPAs. Secondly, a rise in advances across portfolios in the last two quarters may have been a big positive. Thirdly, shareholders may have bet big on SBI’a pullback into profitability in the near term.
But, realisation will have to dawn early in the investment community that there are no quick fixes for losses in banks. The overhaul of banks is a long haul exercise that is arduous and cumbersome.