Banks are sick.

The credit rating agency, Moody's has downgraded the Bank Financial Strength Rating of Indian Overseas Bank, Syndicate Bank and Oriental Bank of Commerce from D to D minus. Being public sector banks they are supported by the government and hence this standalone credit rating is not as significant as it would be for a private or foreign bank. Still it shows the level of stress in our banking system. Moody's says that Non Performing Assets or bad loans for PSU banks have risen to 4.18% from 3.22% a year earlier. But that is not the complete picture. Banks have reduced their NPAs by restructuring loans, which means issuing new loans to cover the bad ones and showing them on their books as new business, or resorting to " compromise write offs ". TOI, 23 March. Allahabad Bank has written off 78.7% of gross NPAs, Andhra Bank 75%, Bank of Maharashtra 65.8%, Bank of India 58.8%, Canara Bank 57% and OBC Bank 52.4%. In total PSU banks have written off 32% of bad loans. We do not know to what extent this was influenced by political influence or bribery. The combination of restructured loans and bad loans has risen to 11.5% at the end of December 2012 from 6.7% in 2011. For Central Bank it has risen from 4.9% to 18.1%, for PNB from 4.5% to 15.5% and for OBC from 8.9% to 14.7%. If banks have been willingly forgiving hundreds of billions of rupees in bad loans why did they not restructure loans of Kingfisher Airlines amounting to a paltry Rs 45 billion? Clearly some people conspired against Mallya to force him to sell majority stake in United Spirits, controlling 40% of the Indian drinks market, to a foreign company. PSU banks are sitting on another bombshell. For the last 10 years they have been lending for long term projects with money from short term deposits. ET, 27 March. In March 2002 infrastructure loans comprised 4.5% of non-food credit of PSU banks but this has risen to 15% at the end of December 2012. At the same time deposits maturing in one year has risen from 29% to 50% of all deposits while loans maturing in one year fell from 42% to 34%. This is called Asset Liability Mismatch which has risen from 4% of bank assets in March 2002 to 17.5% in March 2012. Thus banks need to pay a higher interest rates to attract large numbers of depositors to have sufficient cash for daily business. This is probably why politicians and bank chiefs have been bullying the RBI to reduce rates. Unfortunately for banks domestic savings rate has been falling from 36.9% in 2007-08 to 34% in 2010-11 to 30.8% last year as uncontrolled inflation reduces people's power to save. Salaries are predicted to rise by double digits this year as people expect inflation to continue at this rate. In all this dismal news the good thing is that no one has a clue as to what to do. Especially the World Famous Economist.