Time to look for PSB’s, Corporate Banking instead of Retail Banking

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Manali Bhatia

Schedule Commercial Banks (SCBs) show a substantial drop in their gross non performing assets (GNPA) from s peak of 11.5 percent in FY18 to 9.3 percent in FY19, and if we look upon in figures terms, as per provisional data from RBI, GNPA of public sector banks (PSBs) have shown a significant improvement from Rs 8,95,601 crore to Rs 8,06,412 crore (a reduction of Rs 89,189 crore).

The white hat behind this is the RBI’s supervision and the Insolvency and Bankruptcy Code (IBC). The recent proposed amendment in IBC gives more power and strength to the creditors for the distribution of proceeds, and the resolution timeline is 330 days (including current appeals/cases).

This would be a big positive for corporate banks, especially PSBs as it it reduces the time and speeds up the process. Thus, many cases are supposed to be resolve soon and asset quality to improve further in the current financial year and so on.

In addition, the provision coverage ratio (PCR) of SCBs has improved to 60.9 percent in FY19, up from 48.3 percent in FY18. Now, the interesting questions arise- Why did the GNPAs of SCBs reach 11.5 percent and create an alarming situation for banks and investors? How can we secure our investment in this condition?

Well, the answer to the stated questions is, “overgrowth”- Overgrowth is always harmful. In between 2006 to 2011, PSBs’ lending growth rate was more than 20 percent on a CAGR basis and by FY2014, the total advances reached to Rs 52.15 lakh crore in comparison to Rs 18.19 lakh crore in 2008.

A similar example was set by Yes Bank. In between FY16-18, total advances grew by more than double from Rs 982 billion to Rs 2,035 billion. As a result, everyone could witness a substantial deterioration in asset quality, which is also reflected in company’s share price like PSB’s.

Extreme loan book growth, especially in the lending business, reduces the quality of due diligence. In that event, significant subprime portions are entertained on their loan books.

Now, a similar thing happens in retail lending too. Every financial institute, be it either a bank or NBFC, focuses on tapping retail loans, which is “a big warning signal.”

As a consequence, quality issues arise and one who still prefers prime customers may face a slowdown, which we recently saw with HDFC bank in the last quarter. Their loan book growth slowed down to 17 percent in Q1FY19, down from 24.5 percent seen in the March 2019 quarter.

Eventually, the present condition of corporate banks seems to be improving in terms of asset quality with stable growth. And the recent amendments in IBC would bestow shield. Therefore, it is better to switch from retail centric financial institutes to corporate/diversified banking.