The challenge for the Indian banks is to figure out the sectors that could help them recoup their losses. Few exist at this point. An ICRA report on the sector says up to 50 per cent of their exposure to the power sector may need to be restructured. The sector is the largest borrower from the banking sector at roughly 18 per cent of the total credit for industry. The next largest is iron and steel, also in a slump. Together, the two account for a third of banking credit to industry as per RBI data. Since a disproportionately large percentage of these loans was extended by the public sector banks, the concentration of risks becomes more severe. These banks are under-providing for their risks and hoping the economy will revive to back their bets. Providing for the full risk runs the peril of eroding their capital fast. Since the banks are majority-owned by the government, it would mean a larger demand on the finance ministry to recapitalise them.
Where can these numbers be expected to lead? While the government will have to decide if it can afford to retain the majority shareholding in these banks — and this matter has been debated before — it is the sovereign backing that is now keeping up the value of shares, especially for the smaller ones in the pack. These need to cut their losses soon to retain credibility with investors.