Reasons for Heavy Losses in PSU Banks

PNB reports Q4 loss of Rs 5,370 crore, biggest in Indian banking history. Next to follow suit is Bank of Baroda, Syndicate Bank, UCO Bank and Central Bank. Many more PSU Banks are incurring losses in Q-4, except Union Bank of India which is the only Bank to post Profit of  Rs. 97 Crores. 

What has led to such colossal losses? The RBI’s asset quality review that forced banks to recognize certain loans as non-performing assets (NPAs) in the December and March quarters has led to a free fall in banks’ earnings. Many of these stressed loans that were not classified as NPAs earlier eluded the requisite 15 per cent provisioning.

Though over the last two years banks’ earnings have been impacted by slow economic growth, the bigger factor has been the RBI no longer being in a mood for regulatory forbearance.

Increase in bad loans impacts banks’ earnings in two ways. One, banks have to reverse the interest income they have recognised on such loans. And, two, they have to set aside additional provision for these loans. While public sector banks’ core net interest income grew by 6 per cent in 2014-15, it has been flat in FY16. And with bad loans doubling, many banks have reported huge losses.

Source: Business Line, ET