The banking sector's weak assets, including loans & advances and fixed income investment portfolios, have been estimated Rs 1,35,500 crore (Rs 1,355 billion) as at March 31, 2002 even as the increase in the quantum of weak assets and the underlying capital shortfall were a matter of serious concern for the sector, according to a recent study conducted by credit rating agency Crisil.

Crisil estimates that the banking sector's weak assets as at March 31, 2003, would range between 1.9 to two times the reported gross non-performing assets as at that date.

This only underscores the need to increase capitalisation levels in the banking sector in order to meet any eventuality arising out of credit losses.

The weak assets include around Rs 1,30,000 crore (Rs 1,300 billion) in the loans and advances portfolio of scheduled commercial banks and Rs 5,500 crore (Rs 55 billion) in their non-statutory liquidity ratio fixed income investment portfolio.

The Rs 1,30,000 crore in weak assets represents around 19.1 per cent of the scheduled commercial banks' total loans and advances portfolio as at March 31, 2002.

This is much higher than their reported gross non-performing assets of Rs 70,900 crore (Rs 709 billion), which constituted 10.4 per cent of their total loans and advances portfolio as at that date.

Moreover, the weak assets in the loans and advances portfolio rose by 28.6 per cent over March 31, 2001, when Crisil estimated the weak assets to be Rs 1,01,100 crore (Rs 1,011 billion) or around 18 per cent of the total loans and advances portfolio as at that date.

That's not all. Crisil believes that this trend will continue with weak assets exceeding the reported NPAs as at March 31, 2003, as well.

Crisil's estimate of weak assets also has a consequential effect on the effective provisioning levels maintained by scheduled commercial banks against future capital losses from any deterioration in credit quality.

The agency estimates that, as per the reported provision amount of Rs 35,400 crore (Rs 354 billion) as at March 31, 2002, the amount of unprovided weak assets (in the loans and advances portfolio) is as high as 73 per cent, implying a capital shortfall in the banking sector.

Both the increase in the quantum of weak assets and the underlying capital shortfall are thus a matter of serious concern for the sector.