Starting with “regular missives” from the finance ministry, an unrelenting regulator on interest rates, the year was dominated by past business bets gone bad resulting in mounting restructured assets for the public sector banks (PSB).

The year saw the department of financial services sending around 40 directives to PSBs, in a bid to push them out of their “lazy banking habits” and force them to focus more on lending to agriculture and small and medium enterprises.

One of the many notifications from the ministry was in July, when it shot a letter to the chairmen of PSBs asking them to limit their bulk deposits to 15% of their total deposits. Smaller PSBs have a larger share of bulk deposits and found it difficult to raise funds.

This “micro-management” and “erosion of the PSBs’ “operational autonomy” led to tension and criticism including even from RBI which said the government is not allowing these banks to take into account decisions based on commercial considerations.

If restrictions on their business were not enough, new business for banks seemed conspicious by its absence as companies’ investment came to a halt. RBI’s reluctance to cut rates due to inflation kept the interest rate cycle elevated and coupled with a fiscal policy logjam over project clearances, the urge to invest among companies remained low.

Banks didn’t find many takers for their loan products on the corporate side. The banking sector’s loan growth slowed to below the projection of 17% set by RBI. Fresh sanctions were as good as negligible for most banks. For instance, Pratip Chaudhuri, State Bank of India chairman, had earlier said credit growth is largely due to disbursals of loans sanctioned last year and fresh sanctions to companies are low.

Restructuring menace

By far, the biggest bugbear for PSBs was the unprecedented surge in restructured loans during 2012. Given the economic slowdown, corporates needed to be accommodated in order to help them tide over lean times and banks took the brunt of it on their balance sheets.

For the first two quarters of the current fiscal showed the gross NPAs of 35 banks jumped by 28% or more than R32,000 crore. This took their NPAs to around R1.47 lakh crore as on September 30.

Worst, slippages rose in the year with and without restructuring. PSBs accounted for over 60% of the total slippages of the banking sector.

The big blows to PSBs’ books came from Kingfisher Airlines, Air India, Deccan Chronicles and Suzlon.

State Electricity Boards were another set of asset class that required banks to jack up provisioning.

In contrast, private sector peers strengthened their balance sheets further empowered by early investment in technology.

Private banks’ NPAs as well as restructured assets were low and the year saw HDFC Bank emerge as the most valued lender.

“Year 2012 was a good one for private sector banks despite an environment of slower credit growth and high interest rates. One of the redeeming features that is less noticed is the good fee income performance by private sector banks,” said Romesh Sobti, managing director of IndusInd Bank.

Ray of hope

While the first nine months of 2012 were painful, the October-December quarter brought solace for the sector. Lok Sabha approved the Banking Laws (Amendment) Bill in the Winter Session — hailed by many as a major financial sector reform — but it came after some tough political wrangling.

With inflation fears subsiding, RBI also indicated a rate cut in January-March quarter. Thanks to the approval of the banking Bill (it is expected to be enacted soon), RBI will soon get powers that it has been demanding for a long time (including the power to supersede bank board, among others).

It will also pave way for new bank licences — which could expedite the financial inclusion process — as well as higher foreign investment in the sector as a result of the new law giving greater voting rights for shareholders in a bank.

The stock market has also been kind to most banks despite earnings missing street expectations most of the time.

Barring dips during the release of quarterly results, most PSB shares increased.

For instance, SBI shares fell to R1,829 in May after a sharp rise in restructured assets but have gained over 40% since January.

The current quarter saw most private bank share increase. Shares of ICICI Bank, IndusInd Bank and HDFC Bank rose 60% since January.