How big is the NPA pain in Indian banks?

We did here about President of India signing the ordinance to amend the banking regulation last week. click on Banking Ordinance to get the copy of the release statement.

What this ordinance says as per my understanding is that, RBI gets rights to make sure that NPA’s are dealt in timely manner. Majority of NPA’s sitting on the banks’ Balance sheet are from long time and banks have not done anything about it.

This resolution has been a headline in a lot of the media houses and business community, because now investors are waiting to see the first hit list from the RBI to resolve NPA’s. These NPA issues are mostly in the Steel, Power and gas based businesses. What this means now is the possibility of hair cut by banks.


The haircut in simple terms means booking losses. So imagine I am a bank and you borrowed Rs 100 from me. We had a deal that every year you will pay me 10% interest on the principal. You stopped paying me interest and now the outstanding amount you owe me is say Rs 150.

We are now asked to resolve this in two weeks’ time. As a lender I know that I have to resolve this situation in two weeks or I have to write down entire Rs 150 as bad debts and move on. But I cannot afford to write down such big amount so I negotiate with you.

In two weeks’ time we decided that you will pay me Rs 100 on this account as settlement and I take haircut of Rs 50 on this account. Better than Rs 150!

NPA’s in India

But do you know how big this NPA is in Indian Banking sector? They say it is approximately around Rs 700,000 crore! Out of which Rs 600,000 crore belong to PSU banks as mentioned in this article.

I will not go into the complex structure on how bank works. But imagine if RBI allows you to take deposit of Rs 9 against Rs 1 of your own capital and then lend the money to borrowers.

Deposits will keep growing and your loan book will also keep growing. You will have to report profits and adequately retain profits to keep that capital equation satisfied as per RBI norms.

But this is what happening with PSU banks, deposits and loan book are growing but not profits due to higher provisioning for NPA’s and thus they are feeling stressed over their capital requirements. So PSU banks need fresh capital now. But when you are tackling with such a huge NPA, you need a lot of capital to infuse in the bank.

Government of India is the major shareholder of these PSU banks and if you read this article you get an idea about what is their plan. They are saying fix your Balance sheet first, then we will sell our stake and that money will be utilised as fresh capital. By reading that sentence it looks to me that PSU Banks are going to face huge problem to raise fresh capital.

As an investor I am baffled when I hear someone saying to invest in the PSU banks. To everyone who are looking to invest or are invested in the PSU Banks watch out for these two actions by bank.

Raising Capital

All the PSU Banks will have to raise equity. Raising equity means diluting equity. So this means earnings will be distributed on the bigger outstanding stock number. Not a healthy sign for investor. As it destroys value.


If banks start positively in resolving NPA’s than there is no escape to haircuts. Have a look at the table below. Union Bank GNPA stand at 140% to its shareholders fund. It is still trading at half of its book value today. So market today expects that 65% of its reported GNPA’s can be recouped.

Name Book Value/share – 2017 Gross NPA/share – 2017 % of Book Value
Canara Bank Rs 563.96 Rs 572.61 101.53%
Syndicate Bank Rs 173.73 Rs 194.69 112.06%
Union Bank Rs 348.80 Rs 490.43 140.61%
Axis Bank Rs 235.41 Rs 88.85 37.74%
ICICI Bank Rs 179.64 Rs 73.06 40.67%


Even if I agree with the market on that matter, Union Bank will need a fresh capital of around Rs 12,030 crore as per our analysis to keep RBI happy! The market cap of Union Bank is sitting around Rs 12,500 crore.

They are also in dilemma whether to raise money first or do the haircut first and then raise money from the market. What do you suggest to them?

Think about it!