India’s banks have battled through a fraught period of non-performing loans, and are starting to bounce back. Rekha Gupta Menon looks at how both public and private sector banks have tidied up their balance sheets and increased Tier 1 Capital. 

Baroda

TOP FIVE INDIAN PUBLIC SECTOR BANKS 

1. State Bank of India

The largest public sector bank in the country, State Bank of India (SBI), is also the best performing. In financial year 2018-19, it reported the highest pre-tax profits among public sector banks of $755m and the lowest proportion of bad loans to total loans, with gross non-performing asset (NPA) ratio of 7.43%. Gross non-performing loans at the bank saw a steep decline of 22.68% between financial year 2017-18 and financial year 2018-19.  

The bank’s provision coverage ratio, among the highest in the market, improved significantly from 66.17% in March 2018 to 78.73% in March 2019. “Our balance sheet is very strong and fresh slippages are under control. With our risk management processes we ensure that we are making constant improvement in loan portfolio management,” says the bank’s chairman, Rajnish Kumar. SBI experienced a robust 13.99% year-on-year credit growth, which according to the bank was driven both by the retail and corporate segments. In March 2019, SBI’s loan portfolio crossed Rs4000bn ($57.5bn).

SBI is India’s largest bank, with assets worth $562.2bn, more than three times the assets of the second largest bank, HDFC Bank. It has 435.1 million customers, 22,010 branches, and controls more than one-fifth of banking deposits and advances in the country. Mr Kumar says: “There is an SBI branch for every 70,000 people in India”.

The bank is focusing strongly on digitisation, not only in terms of delivery channels but also with respect to back-end processes. Through a combination of both physical and digital services, SBI is positioning itself as the bank of the future, according to Mr Kumar.

2. Bank of Baroda

Bank of Baroda has embarked upon an ambitious three-way merger with smaller public sector banks Vijaya Bank and Dena Bank, the first such merger in the country. The amalgamated entity, also called Bank of Baroda, came into operation from April 1, 2019. Of the three banks, Dena Bank was the smallest and the weakest. In May 2018, in light of worsening asset quality and rising losses at Dena Bank, the banking regulator, Reserve Bank of India (RBI), placed it under prompt corrective action and Dena has had to operate under lending and operational restrictions for the past year. 

Dena Bank's gross non-performing assets (NPAs) as a percentage of total loans improved from 23.64% at the end of September 2018 to 19.77% at the end of December 2018. In the same period, Vijaya Bank's gross NPAs reduced from 6.17% to 6.14% at the end of December 2018. Data for the fourth quarter of financial year 2018-19 is not available for both banks.

Bank of Baroda is the strongest and largest lender amongst the three and has been cleaning up its books. Before the merger came into effect, for financial year 2018-19 it announced pre-tax profits of $227.7m. Its gross NPAs as a percentage of total loans dropped from 12.26% at the end of March 2018 to 9.61% at the end of March 2019.

The Indian government has injected Rs5.04bn ($72.4m) in the bank to enhance its capital base to meet additional expenses due to the amalgamation with Dena Bank and Vijaya Bank. While under the merger Bank of Baroda retains its position as the second largest public sector bank in India, it becomes the third largest bank overall in the country, ahead of Axis Bank and ICICI Bank.

Before the merger, Bank of Baroda had about 5500 branches in India and 104 branches in overseas locations, Vijaya Bank had about 2116 branches and Dena Bank about 1850 in India. According to Bank of Baroda’s managing director and CEO, PS Jayakumar, it is estimated that the amalgamated entity will have a business mix (deposits plus advances) of Rs15,000bn, and wider geographical reach, with 9500 branches, 13,400 ATMs, 84,000 employees and 120 million customers. Mr Jayakumar says the bank is focusing on digital and technology solutions and has invested in mobility platforms, analytics and artificial intelligence. Market reports suggest that all three banks have the same core banking system, hence technology integration should be relatively smooth.

3. Bank of India

In January 2019, Bank of India was released from the prompt corrective action framework it had been subject by the Reserve Bank of India to since December 2017 because of its weak balance sheet. Over the past year, performance has improved. The government’s infusion of Rs100bn in December 2018 also helped the bank increase provisioning and improve its capital position. It is currently the third largest public sector bank in India, ranked 233rd in The Banker’s Top 1000 World Banks ranking, a jump of 20 places over the 2018 ranking. The bank reported a pre-tax loss of $1.25bn for financial year 2018-19, a 5.99% improvement over the previous year, while its gross non-performing asset ratio also improved from 16.51% at the end of March 2018 to 15.78% at the end of March 2019.   

Over financial year 2018-19, Bank of India rationalised a few bank branches and ATMs to reduce operational costs. It now has 5117 domestic branches and 25 overseas branches. The bank says it is focusing on digitisation and alternative delivery channels. At the end of March 2019, it had 5.73 million retail internet and 1.29 million mobile banking users, mostly in India. While internet use grew at about 11% year on year, mobile banking users grew at a rapid 600% year on year at the end of financial year 2018-19. Bank of India is also implementing several solutions to enhance operations, such as an enterprise-wide fraud risk management framework for real-time fraud monitoring and a tech-driven credit monitoring system for tracking ‘early-warning signals’.

4. Punjab National Bank

One year after being badly shaken by the biggest banking fraud in India of Rs140bn ($2bn), Punjab National Bank (PNB) has been setting systems in place to strengthen its operations. According to a local news agency IANS, the bank recently admitted it has 1142 big and small customers across India who have defaulted on payments worth Rs250bn. PNB has already initiated recovery proceedings against 1108 of these defaulters who cumulatively account for Rs238.79bn of this total.

Though these statistics are appear worrisome, in a press release PNB stated that due to its aggressive stance against wilful defaulters, 150 passports had been impounded in recent months. The bank also stated that it is trying to leverage data analytics for loan recovery and risk management. It is also working towards improving internal systems by incorporating analytics and artificial intelligence for reconciliation of accounts.

PNB has been consistently focusing on improving asset quality. The bank’s gross non-performing assets as a proportion of total loans have reduced from 18.38% at the end of March 2018 to 15.9% at the end of March 2019. In the same period, its provision coverage ratio increased from 58.42% to 74.5%, further strengthening the balance sheet. In financial year 2018-19, although the bank reported a $2.2bn pre-tax loss, this still represents a 22.7% improvement on the massive losses in the previous financial year.

PNB’s domestic business (advances plus deposits) increased by more than Rs1000bn in financial year 2018-19, a year-on-year growth of 11.1%. It also added more than 4.5 million customers in the year to reach 115 million. In this period, internet and mobile banking users grew by 22%, while the debit card base grew by 16% year on year to cross 74.2 million.

5. Canara Bank

The fifth largest public sector bank in India with 6222 branches and 9221 ATMs, Canara Bank’s Tier 1 capital stood at $4.6bn at the end of financial year 2018-19, down 17.32% from the previous year. However, also in financial year 2018-19, the bank experienced a pre-tax loss of $305.25m, a remarkable 69% improvement over the previous year. The provision coverage for the bank has improved from 58.06% to 68.13%, and the bank’s gross non-performing assets went down from 11.84% in March 2018 to 8.87% in March 2019. In this same period, the bank’s total business (advances plus deposits) went up by 12.71% to Rs10,430bn ($149.9bn). Gross deposits went up by 14.15%, while gross advances grew by 10.82%.

A capital adequacy ratio measures a bank’s risk of insolvency from excessive losses. The minimum acceptable ratio in India is 8% at present. As at the end of 2019, Canara Bank’s capital adequacy ratio under Basel III stood at 11.9%, down from 13.22% at the end of March 2018. Local media reports suggest that Canara Bank is planning to raise Rs60bn through a qualified institutional placement.

TOP FIVE INDIAN PRIVATE SECTOR BANKS 

1. HDFC Bank

HDFC Bank, India’s largest private sector lender, has assets over $180bn and $22.43bn of Tier 1 capital. It is also the second largest bank in the country, after State Bank of India. In an industry troubled by bad loans and an economic slowdown, HDFC Bank has consistently outperformed its peers with the highest pre-tax profits and lowest proportion of bad loans. The bank declared $4.96bn pre-tax profits for financial year 2019, a 13.37% jump from the previous year. It is known for its strong credit culture, policies and processes, and boasts among the best portfolio quality in the industry. It currently has a stable 54:46 retail and corporate loan mix with very low exposure to the troubled infrastructure sector. As a result, over the years, HDFC Bank has rigorously maintained its proportion of bad loans at below 1.5%. At the end of March 2019, its gross NPA ratio was 1.39%, against 1.3% at the end of March 2018.

The bank has a customer base of over 49 million, and workforce of more than 98,000. As of end March 2019, it had 5103 banking outlets and 13,160 ATMs across 2748 cities and towns in the country. Of the total banking outlets, 53% are in semi-urban and rural areas. HDFC Bank was among the first few banks in the country to offer internet banking, and today nearly 92% of transactions take place via the internet and mobile phone, compared with only 29% a decade ago.

Despite its stellar performance over the years, the leadership challenge at the bank looms strong. During August 2018, a deputy managing director who was widely considered to take over as CEO, Paresh Sukthankar, suddenly resigned. Since then, RBI approved a two-year extension for the bank’s long-standing CEO, Aditya Puri, and it has embarked on arguably its most challenging task – that of finding a suitable successor. Mr Puri has been with the bank since its inception in 1994 and has successfully steered the bank through two mergers and industry turbulence. This makes him the longest-serving head of any private bank in the country. The new CEO will have a tough act to follow.  

2. ICICI Bank

Financial year 2019 saw India’s second largest private sector bank, which is ranked 98th globally, hitting the headlines for all the wrong reasons. Long-standing CEO Chanda Kochhar was accused of impropriety in lending decisions involving firms that had close connections with her family members. A career ICICI banker and mentee of former CEO KV Kamath, Ms Kochhar was lauded for steering ICICI Bank’s rapid retail growth and shaping the country’s retail banking sector, and for successfully breaking the glass ceiling. The bank’s board appeared unable to take appropriate action, initially giving Ms Kochhar a clean chit but later instituting a committee to investigate the allegations. Ms Kochhar stepped down from her position in October 2018. Now with new CEO Sandeep Bakhshi – another old ICICI hand who has worked across several ICICI subsidiaries, most recently as head of ICICI Prudential Life Insurance – at the helm, it seems to be back to business as usual at the bank.

For financial year 2019, ICICI Bank reported a pre-tax profit of $1.07bn, down 36.55% from the previous year. However, gross NPAs at the bank that peaked in March 2018 at 8.84%, dropped to 6.7% at the end of March 2019. In financial year 2019, the bank experienced a 17% year-on-year growth in domestic advances and 16.4% year-on-year growth in total deposits. ICICI Bank continued to leverage its strong retail franchise and saw a 22% year-on-year growth in its retail loan portfolio, against 14% growth in domestic corporate loans. Retail loans at the bank accounted for 46.9% of the total loan portfolio at the end of financial year 2019.

ICICI Bank currently has a network of 4874 branches and 14,367 ATMs across India. Digital channels accounted for over 86% of the savings account transactions in financial year 2019. ICICI Bank’s strong digital focus is reflected across all businesses. For instance, it was the first bank to implement electronic toll collection on national highways. It has also launched a bouquet of instant loans for pre-approved customers.

3. Axis Bank

After a troubled few years, Axis Bank, the third largest private sector bank in the country, is trying to get back on an even keel.  After RBI’s 2015 asset quality review, Axis Bank, with its large corporate lending portfolio, saw gross NPA ratios shoot up from less than 2% at the end of March 2016 to 5.04% at the end of March 2017, further rising to 6.77% at the end of March 2018. Moreover, in financial year 2016 and financial year 2017, RBI hauled up the bank for substantially under-reporting NPAs. In the quarter ending March 2018, the bank reported its first-ever quarterly loss. These and other concerns about employee misdemeanours (such as leaking financial earnings information ahead of its official release) have cast a shadow, both over the bank and the erstwhile MD and CEO Shikha Sharma.

“We have gone through pretty tumultuous times in the past few years. It's going to be a long journey. Execution from here on is key,” says Amitabh Chaudhry, Axis Bank’s new MD and CEO, who joined in January 2019. He explains that the bank has adopted a ‘GPS’ strategy of growth, profitability and sustainability: “Sustainability is most important. We need to become a more sustainable and credible organisation with optimum risk management and operational controls.”

He adds: “If we want to be seen as a top-notch institution in the banking industry, we cannot afford the kind of issues we saw on the credit risk side and on the operational risk side. We also cannot be seen as [a bank] who is not as conservative as required.” Mr Chaudhry is focusing on growing the retail business and changing the bank’s organisational structure. Market reports suggest that more than 50 mid-level managers have been laid off.  

For financial year 2019, Axis Bank reported a pre-tax profit of $1.1bn, a 1162% growth over financial year 2018 when the pre-tax profit was only $87m.  Its gross NPA ratio improved from 6.77% at the end of March 2018 to 5.26% at the end of March 2019. Axis Bank is planning to extend its physical footprint of 4050 domestic branches with 11,801 ATMs and to also enhance its digital strategy. The share of digital transactions in the overall transaction mix for the bank was 77% as at the end of March 2019. The contribution of digital channels towards the business growth is also increasing. Mr Chaudhry is setting up a digital banking unit that will look at 10 to 15 customer journeys and digitise them completely: “We are looking five years into the future and trying to create a completely new market. By September the team will be up and running, but the impact will be seen two years down the line.”

4. Kotak Mahindra Bank

With Tier 1 capital of $7.8bn, Kotak Mahindra Bank is ranked as the fourth largest private sector lender and the sixth largest bank in India. The bank reported an 8.58% jump in pre-tax profits for financial year 2019, from $1.4bn to $1.53bn. It has among the lowest NPAs in the industry, which improved slightly from 1.95% at the end of March 2018 to 1.94% at the end of March 2019. The bank’s advances and deposits grew at 21% in financial year 2019.

Kotak has 1500 branches nationwide and strongly focuses on using technology to offer products and services for customer acquisition and enablement, says Dipak Gupta, joint managing director at Kotak Mahindra. The bank’s mobile banking transaction volumes grew by 198% year-on-year in financial year 2019. In the same period, 69% of fixed deposits and 86% of the bank’s recurring deposits were sourced digitally. “Our customers, which comprise mainly millennials and Gen Z, reach us through digital channels. This trend is here to stay," says Mr Gupta.

While its performance is strong, recently, the RBI slapped a penalty of Rs20m on the bank for its failure to adhere to a diktat on diluting promoter shareholding. This is an ongoing dispute since 2014. The regulator had asked the bank to pare down its promoter shareholding from around 30% to 20% of paid up capital by the end of December 2018, and 15% by the end of March 2020. Promoter stake dilution would ensure that voting power is not concentrated in one person or group.

5. Yes Bank

India’s fifth largest private sector lender by Tier 1 capital, Yes Bank has been in the cross-hairs of the country’s banking industry regulator ever since it under-reported NPAs for two consecutive years, for financial year 2016 and financial year 2017. The divergence between what the bank reported and RBI’s estimate was over Rs60bn in financial year 2017. During 2018, with the regulator refusing to renew the founder-CEO Rana Kapoor’s tenure, he resigned and the new CEO, ex-Deutsche Bank India head Ravneet Gill, joined in March 2019.

Yes Bank reported pretax profits of $339.6m for financial year 2019, a steep 64.4% reduction from $953.9m in financial year 2018. Its gross NPA ratio also increased from 1.28% at the end of March 2018 to 3.22% to end of March 2019.  While the gross NPA ratio is not overly high, one of the biggest concerns regarding the bank is its exposure to several stressed companies, such as shadow banks, that have defaulted on their debt payments. It is believed that this is also the reason why RBI placed former deputy governor R Gandhi on Yes Bank’s board.

In June 2019, credit rating agency Moody’s Investor Services placed Yes Bank's ratings under review for downgrade. Moody’s explained that the ongoing liquidity pressures on Indian finance companies will negatively impact the credit profile of Yes Bank, given the bank’s sizeable exposure to weaker companies in the sector. In April 2019, the bank classified about Rs100bn of its exposures, representing 4.1% of its total loans, under the watch-list.

Moody’s cautions the loans could translate into non-performing loans over the next 12 months. The agency says, however, that the pressure on the bank’s asset quality (and therefore profitability and capital position) will be somewhat cushioned by its proactive loan loss provisioning for anticipated stress, and the recent appointment of the new CEO and the former RBI deputy governor could lead to a gradual improvement in the bank’s corporate behaviour.   

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter