There is no plan in sight for public sector banks

May 21, 2015

- By Vivek Kaul

Vivek Kaul
One of the points that I forgot to talk about in the recent Master Series chat ("Looking Behind The Modi Smokescreen with Vivek Kaul") that I and Rahul had, was the bad state of public sector banks in India.

As S S Mundra, one of the Deputy Governors of the Reserve Bank of India pointed out in a recent speech: "asset quality [of banks] has seen sustained pressure due to continued economic slowdown." The primary reason for this is the fact that banks have lent too much money to companies. And many companies right now are not in a position to repay the loans they had taken on.

The gross non-performing assets (or bad loans) of banks have been on their way up. As on March 31, 2014, they had stood at 3.9% of their total advances. By March 31, 2015, the number had shot up to 4.3% of the total advances. Crisil Research expects this number to touch 4.5% of the total advances of banks, during the course of this financial year.

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What is worrying is that 40% of the loans restructured during 2011-2014 have become bad loans. A restructured loan is where the borrower has been allowed easier terms to repay the loan (which also entails some loss for the bank) by increasing the tenure of the loan or lowering the interest rate. If 40% of restructured loans have gone bad, it is safe to say that the banks have been essentially restructuring loans in order to postpone recognizing them as bad loans.

Interestingly, bad loans are expected to go up during this course of the year primarily because more and more restructured loans will turn into bad loans. As Crisil Research points out in a recent research note titled Modified Expectations: "Reported gross non performing assets[bad loans] will still remain at elevated levels as some of the assets restructured in the previous 2-3 years, especially in the infrastructure, construction, and textiles sectors, degenerate into non-performing assets again."

And this is clearly worrying. In fact, Mundra during the course of his speech went on to refer to the recent Global Financial Stability Report of the International Monetary Fund(IMF) and said: "Referring to the high levels of corporate leverage, the [IMF] report highlights that 36.9 per cent of India's total debt is at risk, which is among the highest in the emerging economies while India's banks have only 7.9 per cent loss absorbing buffer, which is among the lowest. While these numbers might need an independent validation, regardless of that, it underscores the relative riskiness of the asset portfolio of the Indian banks." This statement coming from one of the top officials of the RBI needs to be taken seriously.

Mundra also pointed out that because of this inability of corporates to repay loans that they had taken on, the public sector banks are in a much bigger mess than other banks. He pointed out that the stressed assets ratio of banks in India as a whole stood at 10.9%.

The stressed asset ratio is the sum of gross non performing assets (or bad loans) plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate. Hence, a stressed assets ratio of 10.9% essentially means that for every Rs 100 given out as a loan, Rs 10.9 has either been defaulted on or has been restructured.

As Mundra pointed out: "The level of distress is not uniform across the bank groups and is more pronounced in respect of public sector banks...The stressed assets ratio[of public sector banks] stood at 13.2%, which is nearly 230 bps[one basis point is one hundredth of a percentage] more than that for the system." The stressed assets ratio of public sector banks as on March 31, 2014, was at 11.7%. The overall stressed assets ratio of banks was at 9.8%.

This is indeed very worrying. Between March 31, 2014 and March 31, 2015, the stressed assets ratio of public sector banks has gone up a whopping 150 basis points. This has hit the capital that public sector banks carry on their balance sheets. As Mundra pointed out: "Our concerns are larger in respect of the public sector banks where the CRAR [Capital to Risk (Weighted) Assets Ratio also known as capital adequacy ratio] has declined further to 11.24% from 11.40% over the last year."

The government seems to have made it more or less clear that it is unlikely to pump in any more money into the weaker public sector banks. Also, given the poor perception and stock price of these banks, they are unlikely to be able to raise capital from the stock market. In such a situation it is imperative they be very careful in handling the capital they have. "The need of the hour for all banks, and more specifically, in respect of the PSBs, is that capital must be conserved and utilized as efficiently as possible," writes Mundra.

What Mundra means in simple English is that banks need to take almost no risk while lending. And this unwillingness of banks to lend has hit the infrastructure sector the most. As Crisil Research points out: "In the past, many private developers have bid aggressively for projects, especially in roads and power. However, most projects have seen execution delays due to issues such as fuel availability, land acquisition and environmental clearances; resulting in significant cost overruns....As a result, poor operational cash flows coupled with rising debt burden have led to a sharp deterioration in the debt-servicing ability of many companies. Banks, too, are wary of lending to the sector."

The PJ Nayak committee report released in May 2014, estimated that between January 2014 and March 2018 "public sector banks would need Rs. 5.87 lakh crores of tier-I capital." The report further points out that "assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores." The budget for the year 2015-2016 provided Rs 11,200 crore towards this, which is not even peanuts given the kind of money that is required.

It is clear that the government does not have the kind of money that is needed to recapitalize the public sector banks. But the money is needed. What is surprising that even though one year has more or less elapsed since the Modi government came to power, no comprehensive plan has been put forward to solve the mess in the public sector banking space.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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7 Responses to "There is no plan in sight for public sector banks"


May 24, 2015

As an ex-PSU banker, I can only say 100% true.Pl ask any groundlevel staff about the present status of JAN DHAN accounts and its effect on profitablity.



May 23, 2015

The problem of NPA in PSBs is mainly due to reasons that only industries become sick, not industrialists. Law does not catch up with fraudsters, thousands of Crores was siphoned off in cases like Deccan Chronicle, Winsome Diamonds etc. Even majority ownership in a company does not have personal liability though they enjoy every benefit in good times, in bad time the baby is thrown at the PSB. YESTERDAY there was a news item which read that some 44 organisation form 40% of PSB bad loans. More over the top management of PSBs are thrust up on from out side, for short periods, who may not have any attachment for the institution , which is not the case with SBI. YOU will agree that role of PSBs and private Banks is totally different , because of the social cause, as could be seen in the success of PMJan Dhan Yojana, direct benefit transfer, latest insurance schemes. Why talk about mergers, global size Bank, when U.S. Is talking of breaking big ones. With regards,


Sarat Palat

May 22, 2015

This is not the first article coming on the subject. There is no problem without a solution. What ever happened is happened. The banks need to see that these sort of things should not recur. The bank should have the guts to say 'NO' to the interference of politicians (both ruling and opposition. The Govt. should appoint efficient & competent persons at the top who are responsible and accountable. Otherwise these sort of things keeps on happening and we waste our time reading these sort of articles.


k c sarangi

May 21, 2015

PSU banks are doing a good job in JAN-DHAN YOJNA.Though there is no visible plan to rescue the PSU BANKS,they have the experience and strength to withstand the crisis.I feel the PSU Banks are a good bet now for long term investment.


Vijay Damle

May 21, 2015

Poor quality of loan assets of public sector banks is a result of manipulative corporate management coupled with poor supervision by bank managements. Corporate India is skilled in pulling out their own stake by inflating asset valuations and run their empires only on the shoulders of the financing banks. When ship shows signs of sinking they leave the ship first and Banks are left with such assets which are not enough to even recover their dues. Even at that stage the bureaucratic handling leads to further erosion of value and banks are left with no alternative but write off the loans . This across the sector and not limited to few players. This malady is spreading instead of being arrested in time. Real NPAs of banks are much larger than what are officially estimated. 4.50% could be tip of iceberg. Only 1/3rd is recognized and 2/3rd is hidden. Sad but this is the true story.

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Pradip Shah

May 21, 2015

Very pertinent point made by Mr Kaul,it could have cascading effect in case of any default & could result into systematic failure. Further,LIC is having large holdings of PSU Banks, GOd forbid if there is any distress sale of any PSU banks shares it could really unsettle the market. The government needs to address this issue most urgently as the NPAS are turning rotten as per RBI Governor.

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R Balakrishnan

May 21, 2015

We all waste our time and energy in analysing PSU Banks- It is the biggest structured fraud. No auditor knows what is going on. He signs on the dotted line. The chairman gets a salary lower than a research analyst. And politicians get their pick from the PSU Banks. It is amusing to see fund managers investing in these stocks and talking numbers. When the whole story is a fable, how can bits and pieces be true? Do we not have other investment options?

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