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 (Photo: Mint)
(Photo: Mint)

Shares of banks, NBFCs fall despite liquidity boosters

  • Markets end nearly 1% lower as investors remain wary of the sector that has seen sticky transmission and defaults
  • Lowering interest rate typically benefits rate-sensitive sectors whenever banks transmit the rates to borrowers

MUMBAI : A 35-basis point repo rate cut and promises of liquidity support failed to cheer banking and financial sector stocks in a weak market, as investors remained wary of the sector that has seen sticky transmission and serial defaults.

The benchmark BSE Sensex index ended at 36,690.50, down 286.35 points or 0.77%, while the 50-share Nifty closed at 10,855.50, down 92.75 points or 0.85%.

With Wednesday’s rate cut, the central bank has now reduced the policy rate by a total of 110 basis points in 2019.

A lowering of interest rate typically benefits rate-sensitive sectors such as banks, automobiles and real estate, whenever banks transmit the lower rates to actual borrowers.

However, stocks in these sectors fell on Wednesday, as analysts said transmission is among factors key to improving investment climate.

The Nifty Bank index fell 1.14%, Nifty Auto 2.16% and Nifty PSU Bank 3.36%. Shares of State Bank of India, Punjab National Bank, Bank of Baroda and Axis Bank were down 3-6%, while non-banking finance companies like Bajaj Finance, Power Finance Corp. Ltd, REC Ltd, Mahindra & Mahindra Financial Services Ltd and L&T Finance Holdings fell.

Amar Ambani, president and research head of institutional equities at Yes Securities said: “On addressing NBFC issues, a special liquidity window may help their cause. This is because banking system liquidity is not so much of an issue anymore. The problem is that of confidence, or lack of it, in lending to NBFCs." Ambani said markets did not react positively since a 50-bps cut was already priced in.

In order to support non-banking financial companies (NBFCs) battling a liquidity crunch, RBI announced two key measures. First, the central bank decided to raise a bank’s exposure limit to a single NBFC to 20% from 15% of the tier I capital of the bank.

Second, it will incentivise banks to lend to NBFCs and, in turn, meet their priority sector lending targets.

However, Murthy Nagarajan, head, fixed income, Tata Mutual Fund, said multiple payment defaults have led to a trust deficit among lenders. He added that RBI and the government need to support transmission of lower rates to these companies.

“We are witnessing mutual funds and banks shying away from lending to NBFCs, housing finance companies (HFCs) and other corporates. Given that many NBFCs and HFCs cater to segments which are not serviced by the banks, the revival of these companies is crucial for the economy to grow at a robust pace," said Nagarajan.

Others agree. According to K. Joseph Thomas, head of research at Emkay Wealth Management, the success of RBI’s accommodative policy would depend entirely on the next level of its application, that is, the transmission of lower rates to the ultimate borrowers. “The banks seem to be seized of this need and effective cascading of the benefits of lower base rate may happen over the next few months," he said.

According to Bekxy Kuriakose, head, fixed income, Principal Mutual Fund, an important takeaway in the backdrop of the ongoing crisis at Dewan Housing Finance Corp. Ltd is that the RBI governor at the press conference indicated that it is important to look at the total outstandings comprehensively when any resolution process is undertaken.

This, she said, shows that the RBI is aware of the flaw in the current stressed asset guidelines which covers only banks and NBFCs and excludes other debt capital market investors.

“The governor indicated that they are having an inter-regulator meeting to address the same. Perhaps clarity on this matter may be expected soon," she added.

NBFCs remain hopeful that the RBI measures will increase consumer spending and help ease the liquidity crunch.

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George Alexander Muthoot, managing director, Muthoot Finance Ltd, said the RBI move to ease lending to NBFCs will boost consumer spending in sectors like automobiles and real estate.

“We expect the rate cuts to encourage the banks for a faster transmission, thereby providing much-needed relief to the cost of funds. The policy clearly focuses on managing inflation and reviving the economy. The overall investment demand and the credit environment of the economy will pick up," he said.

V.P. Nandakumar, managing director and chief executive officer of Manappuram Finance Ltd, also said bank lending to NBFCs (for on-lending to agriculture, micro, small and medium enterprises, and housing) getting priority sector status is a welcome development, especially for MSMEs facing significant challenges in accessing credit.

“Likewise, priority sector benefit for housing and for agriculture are steps in the right direction. We hope RBI will also allow gold loans given to MSMEs and agriculture to be included in the priority sector. We await the detailed guidelines to be released by end August," he said.

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