{"id":3340,"date":"2015-03-14T09:53:11","date_gmt":"2015-03-14T04:23:11","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3340"},"modified":"2015-03-14T09:53:11","modified_gmt":"2015-03-14T04:23:11","slug":"the-mess-in-public-sector-banks-will-not-be-easy-to-sort-out","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/03\/14\/the-mess-in-public-sector-banks-will-not-be-easy-to-sort-out\/","title":{"rendered":"The mess in public sector banks will not be easy to sort out"},"content":{"rendered":"
<\/a> 62% of PSU banks have Tier-I < 9% and
\nThe finance minister Arun Jaitley met the chiefs of public sector banks yesterday for a quarterly review of performance. Media reports suggest that among other things the banks were also asked to cut interest rates on their loans.
\nThe Reserve Bank of India (RBI) has cut the repo rate by 50 basis points to 7.5% during the course of this year. Repo rate is the rate at which the RBI lends to banks. But banks haven’t passed on this cut to their end consumers.
\nThere are multiple reasons for the same. Typically when the\u00a0RBI increases the repo rate, the banks match the increase very quickly<\/a>. But the same thing is not seen when it comes to a scenario where the RBI cuts the repo rate. Banks are normally very slow to pass on cuts to consumers.
\nAs\u00a0<\/span><\/span><\/span>Crisil Research<\/i><\/span><\/span><\/span>\u00a0points out in a research note: “Lending rates show upward flexibility during monetary tightening but downward rigidity during easing. Between 2002 and 2004, while the policy rate declined by 200 basis points, lending rates dropped by just 90-100 basis points. Conversely, in 2011-12, when the policy rate rose by 170 basis points, lending rates surged 150 basis points.”<\/span><\/span><\/span>
\nBut there is a little more to it than just this. The balance sheets of public sector banks are in a big mess. As thelatest financial stability report released by the RBI<\/a>\u00a0<\/span><\/span><\/span>in December 2014\u00a0<\/span><\/span><\/span><\/span>points out: “PSBs [public sector banks] continued to record the highest level of stressed advances at 12.9 per cent of their total advances in September 2014 followed by private sector banks at 4.4 per cent.”
\nWhat this clearly shows is that\u00a0public sector banks are not in great shape<\/a>. The stressed asset ratio is the sum of gross non performing assets 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 (which also entails some loss for the bank) by increasing the tenure of the loan or lowering the interest rate.
\nWhat this means in simple English is that for every Rs 100 given by Indian banks as a loan (a loan is an asset for a bank) nearly Rs 10.7 is in shaky territory. For public sector banks this number is even higher at Rs 12.9.
\nAlso, as the following table from\u00a0<\/span><\/span><\/span>Credit Suisse<\/i><\/span><\/span><\/span>\u00a0shows, 46% of public sector banks have a tier I capital of less than 8% and un-provided problem loans greater than 100% of their networth.\u00a0<\/span><\/span><\/span><\/p>\n
\nUn-provided problem loans > 100%<\/b><\/span><\/span><\/span><\/p>\n