BANKING & FINANCIAL SERVICES

Adecade-

long bull rally in private banks came to an abrupt halt as the Covid-19 pandemic and lockdown gripped the markets. Public sector bank stocks, too, have not been spared. And, the road to recovery looks painful, given the unprecedented growth slowdown.

As the best-case scenario, analysts expect 7-11 per cent loan growth in FY21. Given that disbursements have been practically nil in April, a singledigit growth looks a possibility. Improvement in these assumptions, though, is possible if the government provides a big relief package across sectors, especially for small and medium businesses. Even then, the 16-20 per cent past growth run-rates may be history.

Borrowers have time until the end of May to exercise moratorium on loan instalments. Until now, the regulatory leeway hasn’t seen much takers. Once the moratorium is lifted, how seamless it would be to start collecting dues from customers is unknown because of the current economic conditions. In absence of a broad economic stimulus, as well as an extension of the regulatory leeway, and given the 30-35 per cent moratorium that some private banks are witnessing, bad loans may

spike for banks. Therefore, whether the sector is poised for a recovery in FY22 is contingent on how the asset quality of banks pans out in the financial year and its consequent impact on their capital adequacy.

Troubles for non-banking financial companies (NBFCS) are worse, as they are faced with a liquidity crisis deeper than that in September 2018. With over ~1 trillion of repayment obligations looming, cash flow disruptions could be severe.

Meanwhile, the growing notion is to consider stocks in the asset management, and life and general insurance sectors as alternatives for banks and NBFCS. However, these, too, are facing growth and profitability headwinds. How the unstable equity and debt markets, and weakening domestic savings bite into earnings of AMCS and insurers needs monitoring.