PSU Bank NPAs

Is the worst actually behind these

The fourth quarter ended March 2018 may have been one of the worst quarters for the PSU banks. With a massive loss of Rs.13,200 crore reported by PNB, Rs.7,700 crore by SBI and Rs.5,600 crore by IDBI, the total losses for the fourth quarter alone was above Rs.50,000 crore. Is the worst over for the Indian PSB sector?

That is what market thinks…

If one were to go by the immediate reaction of the markets to the SBI results, it appears like the markets are betting on the bottoming of the NPA cycle. The good news is that most of the losses are already provided and hence incremental risk from here on may not be too high. Of course, there is the grey area over the power sector NPAs which are yet to show up in the books of banks. As of now it is more of steel, textiles, infrastructure and cement NPAs that have been actually either written off or are likely to be recovered under the NCLT process. The doubtful assets of power and telecom are yet to show up and that could be the open risk going forward. Both these sectors have seen margins stagnating and government policies are just not conducive to the recovery of these sectors. Hence, even after the NPA resolution the problem of NPAs from sectors like power and telecom could still continue. That could be the big challenge for banks as they look to complete the NPA recovery process via NCLT soon.

NCLT resolution a boost…

But the real boost for the PSU banks could come from the NCLT resolution. The stage has been set with Tata Steel acquiring Bhushan Steel. Now it is expected that other problem borrowers like Essar Steel, Electrosteel, Binani Cements could get resolved at the earliest. The reason this is important is that the first priority will be repayment of bank loans. In fact, it is estimated that PSU banking loans to the tune of Rs.100,000 crore could find its way back into the books of banks in the form of NPA write backs. That would more than make up for the current quarter losses of Rs.50,000 crore. That is what markets are actually betting on!

Pick up in lending…

The big take-away from the SBI results is that there are signs of credit off-take picking up. Interestingly, SBI is seeing most of its growth in credit coming from the non-corporate and non-industrial segments. It has been driven by home loans, car loans and consumption loans. These are less risky and more stable asset classes compared to industrial lending. More importantly, this massive write back of NPAs will give the lending capacity of PSU banks a big boost and that will be instrumental in bringing back the flow of credit into the economy. With most PSBs at less than 1X book, there could finally be a reason to look at these PSBs to invest!

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