PNB results have come as a shocker with bank reporting loss of more than Rs 5,000 crore in March’16 quarter and about Rs 4,000 crore for the full year. Indeed, all public sector banks which have reported their results have reported losses\/ large decline in profits during the quarter.<\/p>\n
<\/p>\n
So what exactly is happening in the banking sector especially the PSBs…\u00a0To understand this better, the results will have to be looked separately from operational and stressed assets\/ NPAs perspective.<\/p>\n
If we look at the operational aspect, PNB shows a fair performance with 2.2% growth in operating profit for the year. Its cost of deposit has come down by nearly 25 basis points (0.25%) with increase in share of low cost funds which is good. It has increased its advances to retail and small ticket size borrowers where the risk is low and spread out whereas the share of loan to industries has come done by nearly 3%. So far so good.\u00a0The pain lies in provisioning for bad debts which has grown to 8,600 crore in Q4’16 and to more than Rs 16,000 crore in FY16. This is a sharp increase of Rs 7,000 crore over FY15.<\/p>\n
So why has the the provisioning gone up so sharply. Has the debt become all bad in the last quarter… Of course not. The provisioning is now being done with much greater seriousness after stricter guidelines from RBI to clean up the balance sheet.<\/p>\n
And what exactly is cleaning up the balance sheet… It would be pertinent to give a loose analogy with\u00a0an apple seller’s basket to understand the issue. Most of the apples with the seller are good but some are on the verge of rotting but is not separated in the hope that it will be sold before it rots. That makes the total basket size bigger and gives a false impression with regard to business expectations. Similarly in case of banking, some of the loans are on the verge of turning bad but no provision is made (like separating bad apples) in the hope that the money will come back. So, it keeps the balance sheet large like the basket of apples. Once the provisions have been made – the apples are separated – \u00a0it shrinks the\u00a0size of the basket. <\/span><\/p>\n So why is RBI harsh on banks to make provisions…\u00a0<\/span>Unlike the apple seller’s basket, bank’s basket consists of equity funds and deposits, mostly household deposits.\u00a0<\/span>Once, the provisions are made, its equity size comes down and so does C<\/span>AR (Capital Adequacy ratio). (PNB’s CAR has come down from 9.3% at the end of FY15 to 8.4% now). The reduced CAR gives the true picture of banks’ strength, <\/span>puts a brake on its<\/span>\u00a0risk taking behaviour and reorients its business practices accordingly. And RBI wants the banks to be prudent and play only to its strength, not beyond. That is the core of banking. \u00a0<\/span><\/p>\n So, the final lesson… Don’t let your apples rot..!<\/p>\n","protected":false},"excerpt":{"rendered":" PNB results have come as a shocker with bank reporting loss of more than Rs 5,000 crore in March’16 quarter and about Rs 4,000 crore for the full year. Indeed, all public sector banks which have reported their results have reported losses\/ large decline in profits during the quarter.<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[855],"tags":[41,591,611,618,34],"class_list":["post-4019","post","type-post","status-publish","format-standard","hentry","category-banking-finance-2","tag-npa","tag-pnb","tag-provisioning","tag-punjab-national-bank","tag-rbi","membership-content","access-restricted"],"yoast_head":"\n