The strong recovery in banking stocks, which increased by 10 to 12%, in the first half of Thursday’s trade was not fully supported, the hopes of the Minister of Finance for rescue or bailout of the sector not having materialized. The minister, however, kept the option open for more relief as needed, suggesting that some relaxation (on the part of the Reserve Bank of India or RBI) on classification standards assets (critical for classification of non-performing assets or NPA) could come through for the sector. While the hope of some relief has existed for more than 10 days, any further delay could prove costly for the banks. Analysts are already scaling back their profit expectations, with private banks likely to experience a sharper decline. In fact, a widespread drop in profits is also the first of its kind for private banks.
The nationwide blockage, which was originally intended to be more of a problem for the exposure of small and medium-sized enterprises (SMEs) to banks, is beginning to become widespread. “The current pan-Indian foreclosure will certainly affect the cash flow of borrowers, individuals and businesses, which could lead to an increase in APNs for businesses and individuals,” say analysts at ICICI Securities. “The foreclosure will have a negative impact on most sectors and may not be limited to chemicals, textiles, electronics and entertainment,” they add.
The last time banks were exempt from asset recognition was in 2016, after demonetization. The RBI has given 90 days to classify certain personal loans as postcode. “Without a similar derogation from the quarter of March, banks could have trouble navigating,” said a senior executive of a state-owned bank. Another senior banker said that unless such exemptions are granted soon, it may be difficult, especially for private banks, to assist clients. While most public banks have special plans in place for their foreclosure customers, private banks have yet to act. “The longer it takes to roll out these lean measures, the duller the growth period will be for banks,” he added, noting that business volumes have been fairly negligible in the past two weeks. .
Investors should remember that loan growth has been pale single-digit in the last 20-year cycle. Therefore, unless the RBI temporarily relaxes its NPA standards, banks may find the situation more difficult. PhillipCapital estimates that the NPAs could increase by 250 basis points for the sector if flexibilities are not granted.
Thus, “as long as there is no clarity on the type of exemption that the RBI is ready to deploy, investors should not be seduced by the sharp correction in bank stocks,” says a research analyst at a foreign brokerage.