Banking stocks erase gains after ordinance to amend Banking Regulation Act
Banking stocks on Friday fell from record highs after the notification of the Banking Regulations Amendment ordinance failed to meet investors’ expectation. Nifty PSU Bank index fell 1.8%, Nifty Private Bank fell 0.4% while India’s benchmark Sensex Index fell 0.89% to 29858.80 points.
The ordinance empowers Reserve Bank of India (RBI) to intervene directly in the resolution of specific stressed accounts. It authorises the regulator to initiate insolvency resolution process, issue directions to banks for resolution of stressed assets and form committees to advise banks on these resolutions. However this failed to impress the market, which saw the ordinance as another attempt to solve the bad loan issue.
“Market was probably looking at more information and direction on the resolution for particularly the top non performing assets (NPAs) cases,” said Dipen Shah, senior vicepresident 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 capitalisation of 24 listed public sector banks have fallen by 4.3% since the Sensex closed at 21,000 for the first time on November 5, 2010 to ₹5.03 lakh crore from Rs5.26 trillion. However, market cap of 16 private sector banks have soared by 160% to ₹10.83 lakh crore from ₹4.5 lakh crore. Analysts believe the pain will continue for public sector banks.
“It will create pressure on earnings with no major recovery expected for public sector bank in the next 12 to 18 months,” said Saswata Guha, director, Fitch Ratings.
The resolution of NPAs had come to a standstill because banks were unwilling to take a sacrifice 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 the past five years, RBI has come out with several schemes for resolving bad loans, but none of those took off as they were seen as too rigid. As a result, the toxic debt pile climbed, leading to pressure on bank balance sheets and squeezing loan growth.
“Banks who have corporate lending, will see sharp jump in provision expenses in financial year 2018. There is fair 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. Till now it was an advice from central bank to clean up books, now in selected cases it will be an order with this ordinance coming into effect.
Meanwhile, equities on Friday sank the most in six weeks as the Sensex crashed 267 points to settle below 30,000, while the Nifty climbed down from an alltime high after global weakness due to a renewed slide in crude prices. The Sensex hit a low of 29,823.60, before ending at 29,858.80, down 267.41 points, or 0.89%, its biggest single-day fall since March 22 when it had lost 317.77 points. The 50-issue NSE, which surpassed its previous record of 9,367.15 during the day, closed lower by 74.60 points, or 0.80%, at 9,285.30, as investors took profit off the table.