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Oct 23, 2019 | Source: AxisDirect-O-Nomics
The views and opinions expressed are of Mr. Arun Thukral, MD & CEO, Axis Securities.
India’s banking sector has evolved over the past two decades, transitioning from simple automation of paperwork in bank branches to today’s branchless banking paradigms. It supports one of the world’s fastest-growing economies but is grappling with challenges that test its strength and resilience.
Primary among them is the burden of distressed loans and liquidity issues. Unlike the past, however, the focus is not just on the recapitalization of banks but on greater structural changes through recognition and quick pace of resolution for non-performing assets.
The NPA situation is showing signs of stabilization in the past one year with the bulk of legacy NPAs already recognized. As per the latest Financial Stability Report of RBI, GNPA ratio may decline from 9.3% in March 2019 to 9% in March 2020, from the highs of 11.5% in March 2018.
The proposed Rs 70,000-crore capital infusion into public sector banks, announced in the budget, will help PSBs make necessary haircuts on their weak corporate loans and shore up their capital adequacy. PSBs still require substantial reforms to improve risk management, efficiency, and diversity of product offerings.
The liquidity crisis in NBFCs, HFCs, blown up by the likes of IL&FS, DHFL, have brought these segments under greater market discipline as the better-performing companies continued to raise funds while those with ALM and/or asset quality concerns were subjected to higher borrowing costs.
Recognizing that NBFCs play an important role in sustaining consumption demand as well as capital formation, the most important budget measure announced was the provision to create Rs 1 lakh crore securitization facility with a government guarantee. While this government guarantee won’t help clean the entire NBFC mess, it will provide immediate relief to the sector by restoring confidence among NBFCs. The budget proposals may help NBFCs to sell their highly-rated retail pool of assets and address their immediate liquidity needs and correct asset-liability mismatches. However, the asset-quality stress emanating from their wholesale real estate related portfolio will take time to get mitigated.
In the near term, for the private banking space, competition landscape has become better. NBFCs have become weaker and PSU banks are still not out of the woods. The woes of asset quality are behind the large private sector banks. They are comfortable on the capital front and this has helped the run-up in the banking segment. Even if the credit growth were to remain lower, the large private banks will take an incrementally higher market share due to weak competition.
As the Indian economy does well, banks tend to be one of the biggest beneficiaries due to the demand for credit and the fact that market conditions are suitable for growing the loan book. It may be volatile but the sector will remain positive for the coming years. Irrespective of whether investment or consumption does well in the future, the banking sector will stand to gain.
In the short term, the stocks performance is determined by the emotions and opinions of market participants. However, in the long term, the price is driven by the actual earnings performance of the business. To quote Benjamin Graham, the great value investor, “In the short term, the market is like a voting machine, but in the long term it is like a weighing machine.” Investors will do well to focus on operationally sound banks/NBFCs with good corporate governance and stable management well versed in managing risk.
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AxisDirect-O-Nomics