MOODY's TO DOWNGRADE 13 INDIAN BANKS

What's the Threat?

Moody’s have threatened to downgrade 13 Indian banks based on the size of the banking system in relation to government resources, the level of stress in the banking system and its foreign currency obligations relative to the government’s own foreign exchange resources, among other things.

For those living in a fool’s paradise - India’s fiscal deficit is today the biggest cause for worry. The combined fiscal deficit of the Centre and state governments, including oil and fertilizer subsidies, is around 11% of India’s GDP. Moody’s have voiced concern that with such a huge fiscal deficit, the government’s ability to support the banking system through a capital infusion, if needed gets hugely compromised. And it is based on this inability that Moody’s have placed these 13 banks on the watch list.

Factors that Moody's will consider for assessing the rating of banks include the size of the banking system in relation to the government's resources, the level of stress in the banking system, the foreign currency obligations of the banking system relative to the government's own forex resources and changes to the government's political patterns.

WHO ARE TARGETED ?

The banks whose ratings are placed under review are — SBI, ICICI Bank, PNB, Bank of Baroda, Bank of India, Canara Bank, HDFC Bank, IDBI Bank, Union Bank of India, Axis Bank, Central Bank of India, Syndicate Bank and Oriental Bank of Commerce.

The entire assumption of Moody’s is placed on the Govt’s inability to come to the rescue of the banks. But the question we ask is – will these 13 banks need a bailout in the first place? Well, it would be needed if the banks are doing as badly as those in USA. Thanks to the conservative banking system that we have in India, things are really not bad. These 13 banks, irrespective of these trying times have managed to do well.

What would indicate the health of a bank?

First would be the Capital Adequacy Ratio (CAR). This ratio determines the capacity of the bank in terms of meeting the time liabilities and other risks. CAR is thus an indication whether the bank's capital has the "cushion" for potential losses, which protect the bank's depositors or other lenders. Capital Adequacy Ratio = Total Capital(Tier I Capital+Tier II Capital)/ Market Risk+ Credit Risk + Operation Risk. In case of Scheduled Commercial Banks CAR is 9%, private sector banks CAR is 10%, banks undertaking insurance business is 10% and local area banks have a CAR at 15%.

The second criteria would be Non Performing Assets (NPA). There are two types of assets viz.,performing and non-performing. Performing loans are standard loans on which both the principle and interest are secured and their return is guaranteed. NPAs are loans given to doubtful customers who may or may not repay the loan on time.

And then the profitability’s of the banks. Take a look at the table given below, which speaks for itself.

Most Dangerous Situation Banks

1. The findings are quite revealing. Going by the data, none of these 13 banks have a risk as such. All have a CAR above the RBI stipulated 9% for Basel II capital. ICICI has the highest CAR, followed by HDFC Bank. Amongst all, the lowest on the rung is IDBI Bank.

2. NPA indicates that except for four banks – SBI, ICICI Bank, Canara Bank and Central Bank of India, all have a net NPA of less than one percent. The most efficient has been PNB at 0.17% NPA, followed by BoB. This is the NPA when the economy was at rock bottom but now with the economy expected to be on the rebound soon, it is unlikely that bad assets would rise. Higher provisions have brought down the level of net NPAs.

And a look at the net profit figures of the banks indicate that most of the banks have done pretty well for themselves given the circumstances. Except for ICICI Bank, all banks have shown an improvement in net profit for FY09. The best improvement has been shown by Axis Bank, followed by BoB and BoI.

NAME OF BANK	CAR (BaselII) (%)	NET NPA (%)	NET PROFIT (% YoY)
STATE BANK OF INDIA	14.25	1.76	36
ICICI BANK	15.5	1.96	(10)
ORIENTAL BANK OF COMM	12.98	0.65	8
PUNJAB NATIONAL BANK	14.27	0.17	51
BANK OF BARODA	14.05	0.31	55
BANK OF INDIA	13.29	0.44	57
CANARA BANK	14.10	1.09	32.4
HDFC BANK	15.1	0.63	41.22
IDBI BANK	11.57	0.92	17.70
UNION BANK OF INDIA	13.27	0.34	24.51
AXIS BANK	13.69	0.35	69.5
CENTRAL BANK OF INDIA	13.12	1.24	3.80
SYNDICATE BANK	12.68	0.77	7.63