Rs. 1,00,000 crores in profits for banks! How?
Banks made the highest ever profit in the middle of a pandemic! Here's the big reveal on the miracle.
Banking is all about money. It is, therefore, intuitive to assume that they would know how to make money. But this has not been the case with Indian Banks, especially the public sector ones.
Yet, it looks like times are changing. The banking industry as a whole has posted record profits. But, is it sustainable? Or is there more to it than meets the eye? Let’s see.
The banking sector had reported a total loss of Rs. 5,000 crores for FY 2018-19 and the public banks had been a loss-making burden for the last 5 years. However, for FY 2020-21, they reported a profit of Rs 1,02,252 crores (that’s huge!).
The front runners of this sky-high number were HDFC Bank and SBI with HDFC comprising 30% of the industry’s total profits.
Rushing to invest already? Well, hold on for just a few minutes. Let’s understand how these profits came into being and whether they will even sustain.
Banks are the vehicle via which the Central Bank regulates the economy.
Given the current scenario, the banks were expected to take a huge hit. Instead, they flourished. But to understand how, let’s first see how the RBI used its trump card to convert the disruption caused by the pandemic in favor of the economy.
Since 27th March 2020, the RBI via its Monetary Policy Committee has been playing with its tools to minimise economic destruction. It reduced the Repo Rate (the rate at which banks borrow from RBI), which is currently at 4%, an all-time low. Now, since the banks’ borrowing rate is low, they will also lend at a lower rate. And since the economy runs on liquidity, the low-interest rate attracts borrowers to borrow money and spend or invest more to get the economy back on track.
Additionally, RBI also slashed its reserve ratios. The SLR (Statutory Liquidity Ratio~ minimum holding percentage (%) of deposits that the banks are required to keep in the form of liquid assets such as Gold, Government Securities, etc.) was reduced to 18%, and CRR (Cash Reserve Ratio~ minimum holding percentage (%) of deposits maintained by the banks with the RBI in form of cash) to 4%. Reducing these rates ensures that money is freely available for banks to lend. RBI does this in the hope that the banks will lend to corporates, and to people like you and me. Liquidity seeps into the economy.
But, that’s all RBI can do - hope.
Off late, banks have become weary of taking additional risks. So, where do they invest this surplus money? To a giant that’s always hungry for more money - the Government.
The government borrows from the banks by issuing Government Securities and pays interest to banks on these securities.
Now that you have context, let’s go back to 2020.
Between 27th March and 15th July 2020, banks had raised a whopping Rs 5.95 trillion. How?
As Covid hit the entire country, people started saving more. And where did they put these savings? The banks, of course. Moreover, companies and individuals were borrowing less, and whatever opportunity to lend came their way, they came with a risk of default. In such a situation, the risk-averse banks parked their excess money in government securities.
So much so, that 89.4% of the fresh deposits have been invested in them, against the minimum 18%!
Now, with the economy slowly picking up pace, businesses have started getting back on their feet. And as this is happening, borrowings have increased. In order to lend, banks will need the money, and here is where they played their move. By selling their bonds in the secondary market, they got the money to lend and earn interest.
For instance, ICICI Bank made a cool PBT (Profit Before Tax) of 10,760 crores in treasury investments on its total PBT of 26,028 crores. This is 41% of their income!
For the PSBs (Public Sector Banks), this figure of treasury income was as high as 69% of their PBT.
But, this alone did not drive their profits. Back in FY2020, RBI mandated the banks to classify their major defaulting accounts (who had not made interest or principal payments for a long time) as NPAs (Non Performing Assets).
As a result, banks had to create additional provisions for losses in FY2020. However, in FY2021, quite a lot of recovery was made from accounts that were rendered hopeless and were booked as losses in the previous year. This all the more boosted the profitability of the banks.
The government has been taking up the bad loans issue quite seriously. As part of the Budget 2021-22 announcement, a National Asset Restructuring Company Ltd (NARCL) has been proposed by the government. It will act as a company that will eat up bad loans worth Rs 500 crores or above from the banks. This company will then try and recover with these loans while leaving banks to focus on their core business of lending.
But, this income from investing in government bonds is not sustainable. So, their profits from bond trades are clearly set to reduce. Moreover, the problem of bad loans and NPAs have reduced, but not vanished.
A lot also depends on how efficient NARCL really is.
With such uncertainties about the future, are these numbers just a one-time thing, or are they here to stay?
You decide. Until next time, read on...
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Nicely written!👏
❤🧡🖤