Many investors are aware of what is happening in the banking sector, but could not relate what impact it will bring to the whole economy. We are talking about 1.1 million crore rupees of bad debt that many of us are expecting to be officially announced this year and the whole year through by March 2017. To make you understand how big it is, it is the whole GDP of New Zealand for the year we are talking about, it represents 20% of the total loan book of the entire banking system of India.

Not to forget that the majority of this pain is in the public sector banks, so reporting NPA’s around 10% of their loan book is the tip of the ice berg and will go deep unless they are not recapitalised. The recent merge of few public sector banks with SBI group is only part of the solution but not the complete solution. Merging will only help to certain extent to avoid capital raising in the short term but will not solve the entire problem.

Few banks that reported their full year and fourth quarter results this week are as follows. Syndicate bank reported losses for the whole year of Rs 1,517.25 with gross NPA’s standing at Rs 13,832.16 crore (6.70%) and United Bank of India reported losses of Rs 281.96 crore with Gross NPA’s of Rs 9,471.01 crore (13.26%).

Once bank start aggressively writing down bad loans we will witness slow growth in credit, cost of funding will rise and there will be few liquidity issues in the market. RBI might be cutting interest rates in the next 12 months but not all of it will be passed to the end consumers by its banks. If this worsens from here on, we will witness slowdown in our expected GDP numbers too.

We will be keeping a very close eye on the financial results of the bank and keep you up to date on this blog. There will be plenty opportunities to arise to invest in this sector in the coming months and the safest way to invest will be by asking big margin of safety and investing in the quality banks.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.