04

Few years ago, the International Monetary Fund (IMF) remarked that the Indian economy is a bright spot in the global landscape. The IMF acknowledged that the attempts of the Indian government to reduce deficit through fiscal consolidation together with an anti-inflationary monetary policy helped India attain macro-economic stability. India also attained the real GDP growth of 8% in 2015 and 8.2 % in 2016. However, in a span of a few years, GDP growth plummeted into the negative territory (quarter I and II of financial year 2021) and India is now engrossed in a technical recession. Few experts term the influx of Covid-19 as responsible for India’s economic crisis but it is evident that the slowdown started gripping the Indian economy from the year 2017-18 itself. Before the pandemic gripped India, we were a sluggish economy and the pandemic pushed us into a tailspin. Latest estimates by the leading rating agencies and financial institutions indicate that the Indian economy will be hovering around (-) 10% GDP growth in financial year 2021.

However, it astonishes that amid this melancholy, our banks are experiencing a golden time and their profits are scaling heights. It is exactly opposite to the global scenario wherein banks are making outsized provisions to gulp the losses arising out of the Covid-19 provisions. Not only this, a cursory look at the `20.97 lakh crore package (to combat the Covid-19 effect) states that the actual fiscal outgo of the government stood in between `1.5 lakh crore to `2.73 lakh crore i.e., 1% of GDP while a lion’s share of the package was rolled out through monetary stimulus and credit guarantees. Despite these odds, Indian banks garnered profits in the second quarter that ended in September 2020. A brief description of profits earned by different public sector banks is described in the following paragraphs.

Profitability trend in Indian banks

UCO Bank reported `30.12 crore net profits for the second quarter of this fiscal vis-à-vis a net loss of `891.98 crore for the same period of the last fiscal. Also, the bank had posted a net profit of `21.46 crore in the first quarter. The gross non-performing assets (NPAs) too witnessed a decrease of 48% when the second quarter results are compared with the second quarter results of the last fiscal.

Indian Overseas Bank (IOB) reported a net profit of `148 crore for the second quarter of the current fiscal compared to a net loss of `2,254 crore in the July-September quarter a year ago. An improvement in IOB’s gross non-performing assets (NPAs) from 20% (`28,673.95 crore) at the end of September 2019 to 13.04% (`17,659.63 crore) as of September 30, 2020 is cited as the reason behind it.

Similarly, for the Bank of India (BoI), the September quarter consolidated net profit stood at `543.47 crore compared to a net profit of `257.31 crore for the same quarter a year ago. BoI’s gross non-performing assets (NPAs) fell to 13.79% (`56,231.76 crore) of gross advances on September 30, 2020, from 16.31% (`61,475.60 crore) for the year-ago period.

Central Bank of India reported over 20% rise in its net profits at `161 crore for the second quarter ended on September 30 as compared to a net profit of `134 crore in the corresponding quarter of the previous financial year. The Central Bank of India also improved on its bad assets ratio with the gross non-performing assets (NPAs) falling to 17.36% of gross advances by the end of September 2020, from 19.89% by the end of September 2019.

In the same fashion, other public sector banks which announced their September 2020 financial sector results like the State Bank of India (`4574 crore in September 2020 vis-à-vis `3011 crore in September 2019), the Punjab National Bank (`757 crore vis-à-vis `308 crore in September 2019) and the Bank of Baroda (`1678 crore vis-à-vis `736 crore in September 2019) also reported high net profits. The scenario didn’t remain different in case of private sector banks which revealed their September 2020 quarter results.

HDFC (`7513 crore in September 2020 vis-à-vis `6345 crore in September 2019), ICICI (`4251 crore in September 2020 vis-à-vis `655 crore in September 2019) and Axis Bank (`6263 crore in September 2020 vis-à-vis `3406 crore in September 2019) also earned high net profits.

Demystifying the rationale behind profitability

To understand the profitability of Indian banks, we need to go through their lending composition. An analysis of their ending composition highlights that nearly 46% of the total lending is bagged by the big enterprises whereas a small segment constitutes 54% of the total loans disbursed. Further, the share of large corporates and international borrowers stands at 33% and 13% respectively in large sized lendings. Similarly, 33% goes to the retail borrowers, 12% to small industries and 9% to the agriculture sector in context of small sized lending. The big corporates, international borrowers and even the crop growers from the small borrowers’ category did not face any problem in repaying their debts. These segments either had sufficient surplus to mitigate their repayment commitments or they managed to cut down their expenses as per their interests. As far as the agriculture sector is concerned, the inelastic nature of its produce helped it register positive growth even when GDP growth in the economy was low. The actual problem could have accrued from the retail borrowers or small industries.

However, the government first of all announced moratorium on loan repayments till August 31, 2020 and then further guaranteed additional loans to small businesses through banks, thereby postponing the looming crisis into the future. Alongside, the RBI also passed directions to banks to be liberal while rescheduling the repayments in future, thus completely pushing the crisis into the future. These momentary measures are deceivingly showcasing the profits in banks. Through such measures, though the predicament can be deferred for some time, but the problem of defaults may grip the Indian banking sector sooner than later. Further, erroneous handling of this problem may even lead to a situation similar to the financial crisis of 2008 - which completely threw the US economy out of gear.