How bad is the state of public sector banks' non-performing assets (NPAs)? One way of assessing it is to look at stressed assets (including restructured loans) as a proportion of a bank's net worth. It makes for grim reading. For at least 12 out of 18 state-owned banks for which data is available, this ratio is over 100%.
For three of these banks, data for recast loans is not known, so the ratio could be higher.
It is also alarmingly high when compared with that of private sector banks-where it is less than 40% for most lenders and less than 6% for the likes of HDFC Bank Ltd and Kotak Mahindra Bank Ltd.
Now, it is not necessary that all restructured loans will turn bad, but the fact that stressed assets are higher than net worth shows the pressure on capital for these public sector banks.
As stressed assets swell, state-owned banks have to set aside more provisions. This will hurt their profits and shrink their capital further. The fund-starved state-owned banks will be unable to lend, unless the government infuses capital.
Rating agency Standard and Poor's on 16 February warned that state-owned lenders could face deterioration in their stand-alone credit profiles and downgrades if they are unable to raise requisite capital over the next few months. The ball is in the finance minister's court now.
In arrangement with HT Syndication | MINT
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