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Indian Banks caught with their Pants down

May 15, 2017

We have been crying hoarse for some time that Indian private sector banks are hiding their NPAs.  A first whiff of that came last week when India’s banking regulator indicated that banks such as Yes Bank should report a much higher level of NPAs than they actually do through various artifices.  The Yes bank stock tanked.  For some weird reason the market seems to believe that it is a Yes Bank specific problem instead of recognizing it as an Indian Private Sector bank problem.

An interesting World Bank Study came out last week which stated that the recovery from NPAs in the Indian banking sector is 26%.  So the LGD is 74%.  Most Indian banks, even those that are not hiding their NPAs, have provisioned only 10% for their NPAs, clearly nowhere near expected losses.

In summary, India’s public sector banks have correctly estimated the PD (probability of default) of their loan books while grossly understating their LGD.  The private banks are understating their PD as well as LGD.

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From → Credit Analysis

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