Banking sector expected to turn profitable by June quarter

Though loaded with bad loans, the banking sector is expected to return to normalcy after two quarters, a report said.

The banking sector is going through considerable stress given the burgeoning non-performing assets (NPA) challenge as banks are working towards reviewing their asset portfolio and making the requisite provisions which in turn has affected their profits. 

"Based on the asset quality review (AQR) guidelines brought in by the government in late 2015 banks have been making substantial provisions as the NPA levels have increased sharply. Conditions continue to remain grim in Q3-FY17. But it does appear that things are poised to improve after two quarters," a Care Ratings report said.  

To study the performance of the banking sector, the rating agency took a sample of 39 banks including 24 PSBs and 15 private banks for the third quarter of FY17. 

Is banking sector still under pressure?

According to the report, the return to normalcy depends on the four factors. 

Firstly, a negative relationship has been observed between GDP growth and NPA growth. The rating agency believes that recovery in the economy, which is expected in FY18, will help to control incremental growth in NPAs. 

"Second, the extent to which NPAs have been recognized would be important as presently it is uncertain whether this part is completed or not. The RBI had spoken of the books being in order by March 2017, which implies that there should be theoretically one more quarter of distress which will have to address past NPAs", Madan Sabnavis, Chief Economist, Care Ratings, said. 

Third, going by the aggregate provisioning that has been made by banks over the last 5 quarters, it does appear that the level had moderated in the last three quarters and should taper downwards hopefully in FY18. 

And fourthly, the impact of demonetisation, which is still unclear. As per the report, the impact will be more clear after the Q4FY17  number on NPAs. 

Thus, the rating agency expect that the NPA strain would last for two more quarters up to June 2017. 

Based on the report, Gross NPAs continued to increase in 2016 by 59.3% on top of 49.9% in 2015. This was witnessed in both PSBs which was almost stable at 56.4% (50.1% in 2015) and private banks where they increased sharply by 84.2% (47.7%).

"The Gross NPA ratio was high at 9.3% for the entire sample with PSBs having a ratio of 11.2% and private banks 4.1%. Both sets of banks witnessed an increase in this ratio over this time period. The comparable ratios in 2015 were 7.2% and 2.5% respectively.," the report founded.