This article is more than 2 years old.

February 8, 2016 This article is more than 2 years old.

India’s state-owned banks are saddled with bad assets and dropping profitability, which, in turn, is keeping equity investors away.

The numbers provide enough evidence. A look at the market capitalisation—total market value of all the shares of a company—of public sector banks shows how badly stock valuations have been doing.

As of Feb. 05, the market cap of 23 public sector banks—excluding the State Bank of India, India’s largest lender—stood at Rs1.47 lakh crore. Now, compare this with Rs1.26 lakh crore market cap of just one private sector player, Kotak Mahindra Bank, India’s fourth largest private lender in terms of branch network.

Yet, the cumulative assets managed by these banks are 40% higher than that of Kotak Mahindra, Akash Prakash, director and CEO of Amansa Capital, pointed out in a column in the Business Standard newspaper.

Although the low market cap could be because the number of shares traded in the market are lower than private banks, there are other indicators of the worsening situation of India’s government-owned banks. For instance, the Economic Times reported in January that the earnings per share—the profit available for each share—of 21 public sector bank stocks had fallen below their five-year-average. This means they are just not making enough money.

The bad loans conundrum

Much of this grim situation has to do with the sticky problem of non-performing assets (NPAs). As of June 2015, the gross NPAs with public sector banks totalled almost to Rs3 lakh crore ($44 billion)—an annual increase of 27%. These bad loans contribute to 89% of the total NPAs in the banking sector. An NPA is a loan where interest or principal has not been paid for more than 90 days, according to the Reserve Bank of India (RBI).

Everyone, from foreign brokerages to RBI governor Raghuram Rajan, has repeatedly warned about the dangers of growing NPAs. Some believe that a large part is still unreported.

“You can look at the corporate list and you know that there are a lot of NPLs that have not been reported as yet,” Anil Agarwal, head of research-banks (Asia ex-Japan), Morgan Stanley, told CNBC-TV18 in January.

The RBI has set a March 2017 target for banks to clean up their balancesheets. Rajan himself has been meeting bankers to help achieve this.

Meanwhile, a Right to Information (RTI) request by the Indian Express newspaper has revealed that 29 state-owned banks have written off—or waived—bad loans worth Rs1.44 lakh crore between the 2013 and 2015 fiscal years. The newspaper had filed an RTI with the RBI.

Clearly, India’s public sector banks have a lot of cleaning up—and catching up—to do.