Stressed assets higher than net worth for one in three govt banks

Things have gone from bad to worse in India’s banking industry since the central bank cracked the whip on cleaning up balance sheets. In the last six months, 22 state-owned banks reported losses of ₹ 30,700 crore. They also wiped off 16.4% of their net worth. This has affected their already-precarious capital position.

According to the International Monetary Fund’s regional economic outlook report, Indian banks have the worst capital adequacy ratio in the region.

That things have become worse can be seen from the March quarter results.

Consider the net non-performing assets (NPAs) of banks as a proportion of net worth. For 10 of these banks, net NPAs are greater than 75% of net worth.

The picture only gets grimmer. Many of these banks also have restructured loans. Assuming only one-third of these loans will lapse into bad loans, eight banks have a stressed assets to net worth ratio of over 100%; that’s more than one in three public sector lenders. Only two banks have a ratio of less than 75%.

Note that this doesn’t take into account money refinanced under the so-called 5/25 scheme or under the SDR (strategic debt restructuring) scheme.

The fall in this ratio has occurred despite banks making huge provisions for bad loans in the last two quarters, something that led to the heavy losses. Even then, their provision coverage ratios provide no comfort, languishing around 50-60%.

What’s more worrisome is that the pain has not ended. Bank of Baroda, for instance, has said that it has loans of suspect quality worth ₹ 26,900 crore, of which 57% could potentially turn bad this fiscal year. Punjab National Bank has classified ₹ 11,000 crore of loans as SMA-2 (i.e., principal or interest payment is overdue for 61-180 days), a potential source of stress.

The upshot is that there is a lot of pressure for capital at most of these banks. The money the government has promised them is about ₹ 25,000 crore a year—less than their combined losses in the second half of fiscal 2015.

After a bad year, when credit growth hovered around 10%, there is some talk of a bounce back in bank credit if the monsoon materializes and the economy grows faster. But these capital-starved banks will be unable to grow their balance sheets as they wish unless there is a fresh capital infusion. Given their bad shape, it is unlikely that minority investors will cough up cash. And if the banks don’t lend, who will fund growth?

The writer does not hold any positions in the companies discussed here.