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Until recently, public sector banks (PSBs) often showed a sharp drop in quarterly profits, or even a loss, each time a new leader took over. That was because the outgoing CEO always wanted to sign on a good note, show good numbers, and put the hard work back to the successor. The new person is left without much choice and begins the relay with an act of cleansing. This is done by providing for all impaired loans and impaired loans that were late. According to current standards, banks are required to set aside money for potential losses. The new holder wants to start with a clean slate. This usually leads to pain in this neighborhood.
Image of representation. AFP
Have we just seen something similar in the case of ICICI Bank, the country's second largest private lender and a bank currently in the midst of a series of governance problems? business and bad loans? ICICI Bank recorded its first quarterly loss during the April-June period, at Rs 120 crore against a profit of Rs 2,049 crore in the corresponding period of the previous year. Remember, it's the first quarter for ICICI Bank after some major changes in top management. His CEO Chanda Kohhar went on leave and Sandeep Bakhshi was appointed head of the bank as director of operations. There are allegations against certain transactions involving Kochhar and even US authorities are probing the bank on corporate governance and accounting practices.
With regard to the high provisions and the resulting loss, it is clear that the present cleaning was long needed and necessary. The bank ignored the short-term pain in its P & L to put the balance sheet in order. This should help improve the health of the lender in the long run. The loss is mainly attributable to the increase in provisions on loans that went badly and may not go well, some including accounts in bankruptcy. These cases are currently being examined by the National Company Law Tribunal (NCLT).
During the quarter, provisioning and contingencies increased sharply to $ 5,971.29 crores for the reported quarter from $ 2,608.74 crores earlier. Overall, bad debts reached 8.81% of gross advances at June 30, 2018, compared with 7.99% in June of last year. In absolute terms, gross PPNs increased to 53,465 crore rupees from 43,148 crore rupees a year ago. As a result of higher provisions, ICICI Bank's provision coverage ratio increased from 53% to 66%.
The pain of the NPAs may not be over yet. There are a number of cases where further slips are likely and the result will depend on a shabby resolution. If these accounts fail to recover, the parade of bad loans may continue for a few more quarters. But this is not a unique problem for ICICI Bank but for all major business lenders. The overflow on the impact of this phenomenon will be even slower for businesses, especially medium-sized companies, as banks will try to opt for low-risk home loans. This is the reason why most banks reported profits in the June quarter, posted a jump in retail sales and poor growth in business loans. Small and medium-sized enterprises (SMEs) will need to obtain money from non-bank financial institutions (NBFCs) or private investors.
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