A sharp sell-off in banking and financial stocks triggered by rising fears of their exposure to troubled real estate and housing finance companies dragged the stock market down on Tuesday.

Investors are worried that exposure to these financiers may worsen the health of Indian banks, which are already sitting on the world’s worst bad-loan pile.

The benchmark BSE Sensex fell 361.92 points, or 0.94%, to 38,305.41, while the exchange’s banking index, BSE Bankex, crashed 1.55% to 32,378.56 points on Tuesday.

Graphic by Santosh Kumar Sharma/Mint
Graphic by Santosh Kumar Sharma/Mint

There is growing fear about banks’ exposure to real estate and non-banking financial companies in the wake of the recent Punjab and Maharashtra Co-operative (PMC) Bank and Indiabulls Housing Finance incidents, said Arun Thukral, managing director and chief executive, Axis Securities.

“These events have led to over-pessimism and estimation of another bout of fresh NPAs coming from these sectors aggravating the stress levels in the banking ecosystem," he said.

In a rare move, the Reserve Bank of India last week put curbs on withdrawals from Mumbai-based PMC Bank after it discovered irregularities in its lending. Citing a letter written by PMC Bank’s suspended managing director Joy Thomas, news agency PTI on Sunday said the bank’s actual exposure to the bankrupt real estate developer Housing Development & Infrastructure Ltd is over 6,500 crore— 73% of its total assets of 8,880 crore. That is about four times the regulatory cap.

On Monday, shares of Indiabulls Housing Finance Ltd plunged by about 38%—their maximum fall since listing— after Delhi high court agreed to examine the allegations of financial irregularities against the company’s promoters.

Perhaps reflecting fears about banking stocks, Bajaj Finance Ltd on Tuesday surpassed India’s largest lender, State Bank of India (SBI), in terms of market value for the first time. Shares of Bajaj Finance have surged over 50% this year, while SBI’s have fallen 13% in the same period. Bajaj Finance has a market value of 2.32 trillion. SBI, which fell 5.5% to 256 a share on Tuesday, has a market cap of 2.28 trillion.

On 24 September, Morgan Stanley downgraded SBI’s rating to “equal weight" from “overweight", amid asset quality and net interest margin uncertainty. The brokerage said there is a credit crunch going on in India among weaker-rated borrowers as flow of credit from challenged lenders has stalled. “We do not see any signs of this reversing yet, implying risk of continued defaults at these borrowers (small and mid-sized corporates across sectors). Given SBI’s size, it is one of the largest lenders to many of these stressed borrowers. The other risk would be if SBI were asked to help any of the challenged lenders should they face distress. We view re-rating as unlikely unless the macro situation were to stabilise or improve," it said in the report.

Banking stocks have declined sharply over the past few sessions because of a decline in credit growth, default by Altico Capital, and issues with PMC Bank, Lakshmi Vilas Bank and Dewan Housing Finance Ltd.

Among lenders, Yes Bank slumped over 22% on Tuesday, Indusind Bank 5.6%, RBL Bank 7.4%, IDFC First Bank 5.2%, Indian Bank 6%, J&K Bank 5%, Punjab National Bank 5%, and SBI 5.5%. Union Bank of India and Bank of Baroda fell 3% each.

Meanwhile, S&P Global Ratings on Tuesday cut India’s growth projection for 2019-20 to 6.3% from 7.1% estimated earlier.

It said that most alarming has been the precipitous decline in private consumption growth that had been the engine of the economy in recent years — down to about 3% in the June quarter.

The goods and services tax (GST) collection for September slumped to 19-month low falling 2.67% to 91,916 crore from a year earlier. There is concern that low GST collection may increase the risk of fiscal slippage.