The good thing about the banks' falling profits and bad loans in Q3

The third quarter has seen the bad loans of banks, specially the public sector ones, mounting by leaps and bounds. All the public sector banks, from the country's largest State Bank of India to Central Bank of India, Allahabad Bank and Dena Bank to Punjab National Bank have reported huge losses in the quarter ending December 31.

The rising bad loans of banks was a major factor that resulted in a carnage at the stock market on Thursday with the BSE losing over 807 points and the shares of banks tumbling down.

It is the RBI Governor Raghuram Rajan's directive to declare the NPAs by March 2017, which has led all the banks come out in the open and aggressively report their bad loans.

While SBI reported gross NPAs at 5.1 per cent in Q3, Union Bank of India declared the bad loans at 7.05 per cent. PNB has reported highest NPAs in 11 years at 8.47. The net income of banks reduced further in Q3 as the provisions associated with higher NPAs increased. Provisions is the amount of money that banks need to set aside to deal with future and current bad loans.

Central Bank of India, Allahabad Bank and Dena Bank also posted huge losses in Q3 while PNB saw a significant fall in its profits.

But in the entire episode, the good thing is that the banks are now being upfront about their NPAs, which will help them and the RBI clean up their balance sheets with required measures. Hidden NPAs of banks cause more harm to the balance sheets of the banks as bad loans keep on accumulating in the future.

Currently, the reported gross NPAs of banks stands at approximately Rs 3 lakh crore and the total stressed assets make up for 10-12 per cent of the total bank loans given for banks.

There are no surprises, if for the next one year till March 2017, the quarterly earnings of banks report high NPAs. But to deal with the bad loans, a major chunk of which is accountable to wilful defaulters, the banks need to be equipped with effective tools and judicial mechanism to recover loans in time. A blaring example of which is Kingfisher, wherein 19 banks are struggling to recover Rs 7,000 crore loan from Vijay Mallya, who is fighting a court case against the lenders.