SBI’s historic Q2 reaffirms Indian banking sector’s current strength

The highest-ever quarterly net profit of Rs 13, 265 crore reported on Saturday (November 5) for the June-September period by India’s largest lender, State Bank of India, is an indication of not merely the public sector giant’s efficiency of operations, but also is the harbinger of hope for the entire Indian banking sector, which now stands ready to support the next round of investment-led growth that the country now needs.

That SBI, owned to the extent of about 56% by the Government of India and catering to a broad spectrum of customers ranging from millions of Jan Dhan Yojana account holders to the country’s biggest corporates, is able to rake in net profit of almost Rs 150 crore per day is further proof that performance is ownership-neutral.

Public sector banks in general, long vilified to be a drain on the national exchequer, have now turned the corner. Together, they had gross Non Performing Assets (bad loans) of about 15.6 per cent at the end of 2018.

In other words, out of every Rs 100 of loans outstanding, about Rs 16 constituted bad loans. But as at the end of 2022, this was 7.6% , a drastic reduction by any reckoning.

After taking into account the provisions held for these bad loans, this ratio (known as net NPAs) had declined to 2.3% at the end of March 2022 from 8.6% in March 2018.

The market-leader SBI’s net NPA percentage was just 0.80% at the end of September 2022.

On provision coverage too, SBI reported a percentage of 92%, almost the highest for a bank of its size of operations.

This also implies the bank with a balance sheet size of Rs 52 lakh crore and loans of over Rs 30 lakh crore has very little of bad loans, which are not fully provided for.

SBI’s unprecedented quarterly results reconfirm the trends outlined in the last Financial Stability Report of the Reserve Bank of India (June, 2022) about the Indian banking sector.

“The Indian banking sector embarked upon a phase of consolidation during H2:2021-22. Banks bolstered risk absorbing capacity as gross non-performing assets declined to their lowest level in six years.

Macro stress tests reveal that all banks would be able to comply with minimum capital adequacy norms even in a severe stress scenario, although some segments as well as non-banking financial companies may be vulnerable to liquidity shocks”.

The spate of results of other Indian banks including those in the PSU space for the quarter ended September 2022 too reflect the resilience and strength of the banking sector, which went through a time of troubles in the last decade on account of a high proportion of bad loans. PSU lender Bank of Baroda also returned decent results for the quarter on Saturday.

Even the after-effects of Covid seem to have been shaken off, with credit growth for Indian banks averaging about 20 per cent year-on-year.

This points to increased demand for loans across the board from the retail as well as the corporate segments.

That India is probably the only major economy in the world projected to record a growth of over 6 per cent even as the UK, Europe and Japan grapple with either negligible growth or recessionary trends, is vindicated by the robust credit demand from the Indian banking sector.

As is generally the trend, a strong credit growth is a lead indicator of growth momentum in the economy.

More importantly, strong bank balance sheets and ability to lend is a pre-condition for sustainable economic growth.

For instance, an IMF working paper published in July 2022 highlights the importance of ensuring adequate credit growth and improving bank balance sheets, particularly through reducing NPLs, to boost growth.

The paper unequivocally states that “it is only those banks with low NPLs and high credit growth that are associated with higher GDP growth.

At the bank level, to ensure high credit growth, it is also imperative that banks are well capitalized.

This allows them access to more and cheaper debt funding, which is in turn used to fund lending.

These relationships, however, seem to exist primarily for private banks. Public banks, which may have different motivations for lending, appear to be less affected by their capital position in terms of their ability to lend”.

The IMF paper further noted that “looking ahead, efforts to clean up bank balance sheets and boost capitalization—especially for private banks—will be critical in boosting credit growth, and thus GDP growth over the medium term”.

As India looks to boost investments and fund its big infrastructure push through schemes like the Prime Minister’s Gati Shakti, strong financial performance by PSU banks like SBI reaffirm the ability of the domestic banking sector to support India’s development push.

Except for uncertain exogenous shocks, this would mean that India is set to do well in FY 22-23 irrespective of the lower growth trends at the global level though the economy’s performance in FY 23-24 is anybody’s guess at this stage, given the international geo-political uncertainties.

(S. Adikesavan is a commentator on banking and finance)