BackBanking stocks erase gains after govt notifies banking ordinance
Nifty PSU Bank index fell 2.2%, Sensex fell 1% to 29,856.55 points as the ordinance to Banking Regulations Act failed to meet investors' expectations
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Mumbai: Banking stocks on Friday fell from record highs after the notification of the banking regulations amendment ordinance failed to meet investors’ expectations.
The Nifty PSU Bank index fell 1.8%, the Nifty Private Bank index fell 0.4% while India’s benchmark Sensex index fell 0.89% to 29,858.80 points.
The ordinance empowers the Reserve Bank of India (RBI) to intervene directly in the resolution of specific stressed accounts. It authorizes the regulator to initiate the insolvency resolution process, issue directions to banks for resolution of stressed assets and form committees to advise banks on these resolutions.
However, these measures failed to impress the market, which saw the ordinance as just another attempt to solve the bad loan issue.
“Market was probably looking at more information and direction on the resolution of particularly the top non-performing assets cases," said Dipen Shah, senior vice-president and head of private client group research, Kotak Securities Ltd.
Among lenders, public sector banks (PSBs) struggling under mounting NPAs have seen their valuation getting eroded the most. For instance, the market capitalization of 24 listed public sector banks have fallen 4.3% since the Sensex closed at 21,000 for the first time on 5 November 2010 to Rs5.03 trillion from Rs5.26 trillion. However, the market cap of 16 private sector banks have soared by 160% to Rs10.83 trillion from Rs4.5 trillion.
Analysts believe the pain will continue for public sector banks.
“It will create pressure on earnings with no major recovery expected for public sector banks in the next 12-to-18 months," said Saswata Guha, director, Fitch Ratings.
The resolution of NPAs had come to a standstill as banks were unwilling to take a haircut for part of the money they are owed and sell these assets to turnaround specialists or private equity funds. They fear such a haircut could be misconstrued by vigilance agencies.
In five years, RBI has come out with several schemes for resolving bad loans, but none has taken off as they were seen as being too rigid. As a result, the toxic debt pile climbed, leading to pressure on bank balance sheets and squeezing loan growth. “Banks that have corporate lending will see a sharp jump in provision expenses in fiscal 2018. There is a high level of disconnect between current stock prices and asset quality situation," said Asutosh Mishra, banking analyst at Reliance Securities Ltd. According to Mishra, going forward, private banks with focus on consumer lending will outperform banks with higher corporate loans.
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