Last week,Moody’s Investors Service threatened to downgrade 13 Indian banks. The ratings agency is reviewing India’s ability to provide support to its banking system. The combined fiscal deficit of the Centre and state governments, including oil and fertilizer subsidies, is around 11% of India’s gross domestic product, or GDP, and such a high deficit curbs the government’s ability to support the banking system through a capital infusion, if needed.
In its assessment of systemic support, Moody’s will consider the size of the banking system in relation to government resources, the level of stress in the banking system and its foreign currency obligations relative to the government’s own foreign exchange resources, among other things.
Also Read Tamal Bandyopadhyay’s earlier columns
Early in May, US President Barack Obama’s administration conducted stress tests of the US banking system and there was no surprise in the result: 10 of the largest 19 US banks need $65 billion (around Rs3.07 trillion) in funds to boost their capital. US treasury secretary Timothy Geithner is “reasonably” confident that the banks could raise the capital on their own, but the government will not shy away from providing capital, if necessary. The 19 banks, tested by 150 examiners of the US treasury and the Federal Reserve, account for two-thirds of the total assets of the US banking system, and at least 50% of the total credit in the US economy.
I am not qualified to conduct stress tests of Indian banks. But it may not be a bad idea to take a close look at some of their critical financial parameters and the impact of the global credit crunch on their balance sheets. Except for a few banks such as Jammu and Kashmir Bank Ltd, Development Credit Bank Ltd, City Union Bank Ltd and Lakshmi Vilas Bank Ltd in the private sector and United Bank of India and Punjab and Sind Bank in the public sector, all Indian banks have announced their earnings for fiscal 2009. Since foreign banks operating in India account for just about 8% of banking assets, the performance of state-run and private banks provides a fair idea of the health of the national banking system.
The findings are quite revealing. Going by the data, collated by Ashwin Ramarathinam, Mint’s research analyst, only two banks had less than 11% capital adequacy ratio, or CAR, in March 2009. They are Dena Bank(10.73%) and State Bank of Hyderabad (10.58%). Going by the current norms, banks in India are required to maintain 9% CAR, expressed as a ratio of capital to risk-weighted assets. In other words, for every Rs100 worth of assets, a bank needs Rs9 of capital. This is a very critical indicator of a bank’s health. Twenty-eight of the 35 banks that have announced their 2009 earnings so far have at least 12% CAR or more and some of them even a far higher capital cushion. For instance,Federal Bank Ltd has 20% CAR; Yes Bank Ltd 17% CAR; and ICICI Bank Ltd, India’s largest private sector lender, 15.53% CAR.
Another key parameter to judge the banking system’s health is the level of its stressed assets. With corporate earnings shrinking and many individuals losing jobs in a slowing economy, it is only natural that banks’ non-performing assets, or NPAs, will grow.
A rise in NPAs affect banks’ health as they do not earn anything on such assets and, on top of that, banks need to set aside a portion of their income to provide for stressed assets. Even in the worst year for the financial sector in independent India, local banks have not seen any dramatic increase in their NPAs. In fact, 25 of 35 banks that have announced their earnings so far have less than 1% of their advances categorized as net NPAs and 10 of them even have less than 50 basis points net NPAs. One basis point is one hundredth of a percentage point. Net NPAs are arrived at after money is set aside to cover gross NPAs. Only two banks have at least 2% net NPAs. They are Kotak Mahindra Bank Ltd, 2.39%, and ICICI Bank, 2.09%. State Bank of India, the country’s largest lender, has 1.76% net NPAs. Punjab National Bank’s net NPAs are 17 basis points and that of Andhra Bank, 18 basis points. Indeed, the Reserve Bank of India’s insistence on restructuring those loans where borrowers are not in a position to pay on time has helped banks to arrest the rise of stressed assets, but with fledgling signs of recovery in sight in various pockets of the economy, most of these loans are unlikely to add to banks’ bad assets.
The gross NPA level is relatively higher at two banks, ICICI Bank and Kotak Mahindra Bank—holding around 4.3% gross NPAs each—and Federal Bank, carrying 5.57% gross NPAs. However, the overall industry does not project an alarming picture. Higher provisions have brought down the level of net NPAs and banks have been able to make such provisions because they recorded hefty profits
Net profits of 35 banks rose 27.20% in fiscal 2009 to Rs41,545.54 crore. Public sector banks, as a group, performed better than their counterparts in the private sector, collectively posting close to a 31% increase in their net profits while private banks’ profits on an average have gone up by 16.75%. At least nine banks’ net profits have gone up by 50% or more in 2009 and only four in the pack of 35 banks that have so far announced their earnings have shown a drop in their net profits. They are ICICI Bank and Kotak Mahindra Bank in the private sector and Allahabad Bank and Vijaya Bank in the public sector. Indian banks remain healthy and profitable even in the worst of times. Shouldn’t we send flowers to our bankers to say thanks?
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as a deputy managing editor of Mint. Please email your comments to firstname.lastname@example.org