How much of PSU banks’ net worth could be at risk?

Last week, CNBC TV18 reported that the Reserve Bank of India (RBI) has ordered a forensic audit of United Bank of India accounts, owing to a deterioration in its asset quality. The bank has more than doubled its gross non-performing assets (NPAs) in the past six months, way higher than state-owned banks as a whole.

Yes, if one looks at net NPAs as a proportion of net worth, United Bank would appear to be an outlier. This ratio is 80.73% for this Kolkata-based bank, compared with 28.79% for 20 of the largest state-owned banks. But if restructured assets are added to the mix, then the picture gets worrisome. Impaired assets account for 99% of net worth for the top 20 banks. For some lenders such as United Bank and Central Bank of India, these loans are at least one-and-a-half times the net worth.

Given the low provision coverage ratio for state-owned banks in general, any increase in bad loans, or slippages of restructured loans into the bad loans category, will lead to an increase in further provisions. That will not only erode net worth but also lead to equity dilution.