The quarterly results announced by large private sector lenders, such as ICICI Bank Ltd and Axis Bank Ltd, have been shockers. Quarterly profits have tumbled because of bad loan provisions. Public sector lenders like Bank of Baroda and State Bank of India took it on the chin in the previous quarter.
The Narendra Modi government and the Reserve Bank of India led by Raghuram Rajan deserve credit for forcing banks to come to terms with their bad loans. It is not just a question of ethics. There is strategic value in transparency as well. Indian banks need large amounts of capital that cannot all be provided by the government. Private capital will also be needed. The problem so far is that investors have not been prepared to put money into bank equity because they were not sure about the true state of their loan books. They fear the worst.
It may seem paradoxical, but investors who are prepared to invest could actually welcome the poor bank results.