A grim scenario for banks’ capital adequacy

Bad loans that have not been provided for make up close to one-fifth of the net worth of Indian banks


Bad loans’ position in Indian banks has deteriorated since September last year. Photo: Ramesh Pathania/Mint
Bad loans’ position in Indian banks has deteriorated since September last year. Photo: Ramesh Pathania/Mint

How does one assess the loss-absorbing capacity of bank capital? One yardstick is to look at net bad loans (i.e. excluding those that have been provided for) as a proportion of banks’ net worth (sum of capital and reserves on their balance sheets).

The table, culled from the International Monetary Fund’s Financial Soundness Indicators, shows that bad loans that have not been provided for make up close to one-fifth of the net worth of Indian banks. That number is among the highest in the Asia-Pacific region. China has a negative number, which means that it has made provisions in excess of bad loans, although that number is highly suspect. But it doesn’t say much for Indian banks when those in Congo score much better on this metric.

While India’s banks have not reached basket case proportions like those of Greece, the fact is that even this number warrants caution. For one, it doesn’t seem to include restructured assets that attract a lower rate of provisions. Second, bad loans’ position in Indian banks has deteriorated since September last year, which is the date of the data. And third, the overall figure hides the fact that for several state-owned banks, this yardstick is in excess of 100%.

As this column has previously shown, including stressed assets, this ratio is as high as 200% for a couple of banks. That highlights the desperate need for capital injections.

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