John Samuel Raja D: Bank on them

With the economy slowing, many are predicting a surge in non-performing assets/loans (NPAs) of banks. If true, would this mean that Indian banks would begin to go the way of several leading global financial institutions? Which is why the government set up a committee on Financial Sector Assessment, headed by RBI Deputy Governor Rakesh Mohan, examined the impact of higher NPAs on the capital adequacy of banks.

While NPAs are around 2.4 per cent today (as compared to 13.1 per cent in 2000), the Capital-to-Risk-Assets-Ratio — CRAR is the total of the banks’ equity and reserves as a proportion of the total loans — is 13 per cent today. The Committee found that, in the worst case scenario, if bad loans rose by 150 per cent, the capital adequacy would fall by around 2.4 percentage points, to 10.6 per cent, which is still quite comfortable — the CRAR mandated by the law is 9 per cent. Of course, crises don’t come in isolation (a banking crisis could combine with a balance of payments’ one), so the RBI may want to carry out some more stress tests to take these into account as well.
 

No Problem Assets
(Impact of increased non-performing assets, or NPAs, on capital adequacy of banks)

If NPAs
increase by ...

 Change in capital adequacy*

Banks
impacted# Mar ‘08

Sep ‘08

25%12.30na5.00 50%12.10na5.00 100%11.6011.008.00 150%11.0010.6012.00 *The capital adequacy, or Credit-to-Risk-Assets-Ratio, is around 13 per cent currently
# Banks whose capital adequacy will go below 9 per cent