Banks slipped up in last 3 years: Finance ministry

The author has posted comments on this articleSidhartha, TNN | Jan 2, 2015, 07.34AM IST

From loan-to-GDP ratio to stability, the story is one of slide with bad debt being the main culprit. 

PUNE: Most planes landing in Pune on Thursday evening had a more than a sprinkling of top public sector bankers, who were preparing to spend the night going through the background notes prepared by consulting firm McKinsey on the six issues on the agenda for the first ever banker's retreat.

Unlike the political message being given by most BJP ministers on the gloom and doom in the UPA years (2004-14), a finance ministry note for bankers suggests that this was a decade when "Indian banking made good progress in improving access and maintaining stability", as is borne out by various parameters. The only — and key exception — was profitability.

So, if the ratio of loans to GDP went up from 0.3% in 2004 to 0.5% in 2014 it was thanks to higher loan penetration manifested in the percentage of ownership rising from 5% to 12%. The number of financially excluded households too went down from 41% to 35%.

Although efficiency levels remained reasonable, there appeared to be more stability as bad debt, measured by net NPA to loans, was down from 2.9% in 2004 to 2.2% in 2014. And, thanks to the regulatory prescription, banks had higher capital adequacy ratios.

But it came at the cost of profitability, the slide shared with bankers, would show. Not only was the compounded annual growth rate for profits down to 5% in 2014 from 46% in 2004, the return on equity halved from 19.8% to 9.6%.

Now, if you splice the data for the last three years — between 2011 and 2014 — the note shared with bankers says "the sector has shown a sharp downward trend across stability and value creation metrics".

From loan-to-GDP ratio to stability, the story is one of slide with bad debt being the main culprit. For instance, net NPA-to-loans ratio doubled from 1.1% in 2011 to 2.2% in 2014. And, not the entire stress is reflected in NPAs as the share of restructured loans shot up from 3.5% of all loans in 2011 to 8% in 2014.

And, to top it up the credit growth has been slow — which the government and industry believes is due to high cost.

Over the next two days, state-run bank chiefs and executive directors will split into six groups and deliberate on how to develop a new model to deal with critical issues ranging from universal financial inclusion to dealing with risks such as bad debt and consolidation. ---------------------

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