Ejaz Ayoub
After going through the recent write-up on Daily Mint by Tamal Bandyopadhyay regarding deteriorating health of asset portfolio of Indian Banking Industry, I came across some very interesting observations. Although the analytical assessment presented by the author was based on data of Indian Banking Industry as a whole but when compared with the figures of the only listed company of J&K i.e. The J&K Bank, I was quite impressed the way our state based bank has out performed some of the big names in the industry especially given the important factor which makes J&K bank worth applause is that a major portion of its service delivery network operates in a very unstable political environment.
A Bank is a financial institution which is authorized to accept public deposits and channels those deposits into lending activities. Deposits come at a cost and lending is the source of revenue. The difference between the interest paid on the deposits and the interest earned on assets is termed as Net Interest Income (NII), which is the major contributor to the profits of a bank. The business model sounds quite simple and executable but in reality it requires strategic effectiveness and operational efficiency to make sure that public deposits are routed to creditworthy borrowers at a cost which will not only cover the cost of funds & other operational costs but will also earn margins for shareholders of the bank. The twist in the story comes when the loans go bad which implies that not only the anticipated profits on the bad assets go numb but also the principal amount goes down the drain. This creates a severe stress on the banks balance sheet and in order to address the loss a bank creates a capital provisioning for these bad loans which are called as Non-Performing Assets (NPA) in banking terminology.
If we take a look at June results of J&K bank, the Gross NPA ratio stands impressively at 1.67 % compared to gross bad assets of Central Bank of India which exceeded 6% of its advances in the June quarter. For another six banks, four of which are majority owned by the government, they are above 5% of loans. Gross bad assets of five more banks, all of them are in the public sector, in June have been more than 4% of their loan books. After setting aside money for bad loans, net non-performing assets (NPAs) of J&K Bank stands at 0.14% and for one bank in June have been in excess of 4% and that of seven banks over 3%. Net NPAs of the State Bank of India and Punjab National Bank, India’s largest and second largest lenders, have been close to 3%.
As rightly put by Bandyopadhyay, the bad assets in isolation do not reveal the gravity of the problem. They need to be seen along with restructured assets. The combination of gross NPAs and restructured assets in March 2013 for entire banking industry has been 9.25% while as J&K bank hovers around only 5.44%; again outperforming the industry trends. The deterioration in quality of assets can be assessed looking at the accretion of fresh NPAs, or the so-called slippages. In March, this ratio has been 2.72%, up from 2.05% in March 2011 for overall banking industry. The combination of fresh slippages and fresh restructured advances as a percentage of total advances in March 2013 for J&K Bank is only 3.86% and for banking industry as a whole it has been 5.91%.
One more competitive edge that J&K bank has over rest of the banks is its deployment of asset portfolio mix into domestic and foreign instruments. Unlike other banks J&K Bank is protected against foreign exchange risk particularly in current scenario of eroding Indian rupee. The reason for low foreign exchange risk is J&K banks deliberate decision of keeping foreign exchange exposure low. A sharp depreciation in Indian currency will make Indian corporates unable to repay foreign loans. The current exposure of Indian Banks towards foreign exposure is to the tune of $170 billion of which only 30-60% has been hedged.
The NPA figures reflect the effectiveness of credit policy and risk management functions of the bank. When the entire banking industry is suffering from huge NPA’s and poor recoveries J&K bank is emerging as a resilient market player. The past profit and business trends of J&K bank shows that it has grown tremendously and the most important factor which sets its growth apart from the rest of the Indian banks is quality and stability of growth. The numbers are self speaking and show the strong fundamentals that the banking is holding on to. The business model adopted by the bank to be a universal financial solution provider in J&K and a specialist bank in rest of the India is yielding fruits and showing tremendous promise. Let us hope that this financial backbone of the state remains resilient and keeps growing steadily.
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