LEHMAN EFFECT

A few senior executives of the state-run banking industry disagreed with what I wrote a week
agothat they are apprehensive about new banks eroding their customer base. According to
them, state-owned banks have the strength and agility to take on competition. When the first set
of new banks appeared on the scene in the mid-1990s, core banking solutions were something
unknown to the state-run lenders, but they embraced the technology and changed the way
banking was done.
The senior bankers blame the current state of affairs on the Indian economyafter all, banks are
a proxy for the economy and when growth falters and the investment climate is dull, banks
cannot thrive. The villain of the piece, it seems, is the US investment bank Lehman Bros
Holdings Inc.
India suffered relatively less from the global financial crisis that followed the collapse of
Lehman Bros, but local banks went for large-scale restructuring of loans, many of which later
turned bad.
While that created a big pool of bad assets, the sluggish economic growth has discouraged
companies from investing in new projects.
Their arguments have encouraged me to take a look at how Indian banks performed in the five
years before the collapse of Lehman Bros in September 2008between fiscal year 2003 and
2008, when both inflation and interest rates were low and credit demand was highand six years
after that, between 2009 and 2015, much of which has seen high inflation and interest rates and
low credit growth. Comparable data are available for 36 listed banks25 public sector and 11
private banks.
n the five years between 2003 and 2008, the net profit of listed banks grew at a compound annual
growth rate, or CAGR, of 18.4%. In absolute term, the collective net profit of this set of banks
was Rs.14,520 crore in 2003, and this rose to Rs.33,826 crore at the end of March 2008.
However, as a group, private banks net profit grew at a CAGR of 28.1% in this period,
compared with 16.1% for state-run banks. The contrast is starker in the six years that followed
the Lehman crisisbetween 2009 and 2015, the listed banks net profit grew at a CAGR of
10.8% but the public sector banks CAGR dropped to 1.73% even as private banks net profit
grew at a CAGR of 30%.

This has happened because banks had to set aside money or provide for their growing bad loans.
In the five years preceding the Lehman bankruptcy, gross non-performing assets (NPAs) of the
listed banks actually dropped at a CAGR of 3.33%. The drop in gross NPAs of public sector
banks was even sharpera 5.42% CAGR decline to Rs.39,663 crore from Rs.52,419 crore.
However, after the Lehman crisis, the listed banks gross NPAs rose at a CAGR of close to 40%
in six years till 2015, from Rs.59,571 crore to Rs.3.19 trillion.
In the June 2015 quarter, it rose even further. During this period, public banks gross NPAs rose
at a staggering 45.6%from Rs.44,200 crore to Rs.2.89 trillion while private banks gross
NPAs grew at one-third the pace14.6%.
The story of net NPAs, after provisioning, is similar. In the five years between 2003 and 2008,
listed banks bad assets actually declined. But in the six years between 2009 and 2015, the net
NPAs of listed banks grew at 45.23%. As a group, private banks net NPAs grew at 13.9% while
public banks net NPA growth was almost four times thata CAGR of 51.3%.
If we look at the movement of NPAs as a percentage of loans for individual banks, the contrast is
equally stark.
Among large private banks, ICICI Bank Ltds gross NPAs rose from 3.3% in March 2008 to
4.32% in March 2009 and dropped to 3.68% in June 2015. For HDFC Bank Ltd, the comparable
figures are 1.34%, 1.98% and 0.95%; for Axis Bank Ltd, they were 0.72%, 0.96% and 1.38%.
State Bank of India, the largest lender in the country, had gross NPAs of 3.04% of advances in
March 2008; it dropped to 2.86% in March 2009 and rose to 4.29% in June 2015. The
comparable figures for Punjab National Bank are 2.74%, 1.6% and 6.47%; and for Bank of
Baroda, 1.84%, 1.27% and 4.13%.
The same trend is visible in net NPAs, where HDFC Bank and Axis Bank have all along
recorded bad loans of less than 1%, while ICICI Banks net NPAs dropped from 1.55% in March
2008 to 2.09% in March 2009 and 1.58% in June 2015.
In the case of both Bank of Baroda and Punjab National Bank, net NPAs rose from less than 1%
in 2008 and 2009 to more than 4% in June 2015, while State Bank of Indias net NPAs veered
between 1.78% in March 2008 and 2.24% in June 2015. Clearly, public banks are more
vulnerable than their peers in private sector when it comes to the quality of assets.
As far as business growth is concerned, the Lehman collapse affected all. In the five years before
it, the deposit portfolio of the listed banks grew at a CAGR of about 20%. While 25 public
banks deposits grew at 17.6%, the 11 private banks deposits grew at 32.8%, albeit on a smaller
base. Post the Lehman bankruptcy, till March 2015, the listed banks deposit growth dropped to

18.9%. While public banks deposits grew at a marginally higher pace of 18.6%, private banks
deposit growth slipped to 20.6%.
The deceleration in the loan book is sharper. Between 2003 and 2008, the listed banks loan book
grew at a CAGR of 26.3%with public banks loan growth at 24.5% and private banks at
34.3%. In the past six years, the loan growth of listed banks slowed to 20.2%, with private banks
growing at 22.2% and public banks at 19.7%.
Indeed, the Lehman effect on Indian banks is hard to ignore, but after seven years, its time the
Indian banks got over it and made a fresh beginning.