Sunday, 8 September 2013

India’s Banking Sector - Resilient Entity or Mute Spectator

In the recent times, the banking sector has been in the midst of a storm with the various PSU and private banks’ stocks seeing a lot of correction and their Q1 numbers not lifting the spirits either. The BankNifty index has experienced a fall of 20% and touched its lowest point of Rs. 8664.2 recently.

In any economy the Banking and Financial Industry (BFSI) acts as a facilitator which lends money to the economy to help it flourish and expand. It can thus be expected that if the economy is affected by any positive or negative developments, the Banking sector will be one of the first to experience of the repercussions. 

Banking sector is the first to experience lower valuations and correction in a downturn and conversely, when the economy is in an uptrend, they are the ones to show the first signs of appreciation. This is because of the very nature of banking as commercial entities. Our post on the Business of Banking further explains the interrelationship between any modern economy and its banking industry. 

The performance figures of the banking sector in the recent times presents the sorry state of the economy. The figures of the top 4 banks in India are presented here for a clearer picture :

Gross NPA
FY 2011-12
Gross NPA
FY 2012-13
Gross NPA
Q1 FY 2013-14
Gross NPA
Q4 FY2012-13
Gross NPA
Q1 FY 2012-13
Axis Bank0.94%1.06%1.10%1.06%1.06%
ICICI Bank3.62%3.22%3.23%3.22%3.54%

India is currently facing many varied economic issues which have eroded the confidence and sentiments of seasoned investors of all categories. The Rupee is fast depreciating beyond what is generally believed as its fair value, the Current Account Deficit still shows no signs of narrowing down and Inflation plays havoc with the lives of common man. The sad situation of economy is constantly reflected in the periodical IIP and GDP numbers.

FY 2011-12FY 2012-13Q1 FY 2013-14

The IIP for June 2013 stands at  -2.2% (Source CSO-MOSPI)

The high CPI  (average 10% for the past one year) and WPI (average 6.9% for the past one year) numbers have led to a high interest rate regime, which has resulted in slowing down the GDP growth, which in-turn has resulted in low demand scenario. This has impacted the industry across all sectors and banks as lenders have suffered the repercussions with asset class deterioration, rise in NPA and debt restructuring demands from corporates.

NPA is that part of the loan which is not generating any interest income which reflects the other parameters of the bank ultimately reflecting in the share price correction and low valuation. Our post on the Fundamental Parameters of Banking lists the various parameters on which the banks can be compared. A rise in NPA affects almost all of the other parameters of the bank.

It is natural that when the economy is facing problems, the banks are bound to be affected and be under pressure. The present problem with the banking sector has some characteristics unique to India. Part of the problem lies with the difficult global economic scenario which is, in general facing a turbulent time. This is especially true for an emerging market economy like India. The other part of the problem is due to many bad loans given by the banks to corporates and companies without strict surveillance and scrutiny. All these bad loans are now coming back to haunt the banking sector. 

The present emphasis by the govt. and RBI to deal aggressively with wilful defaulters and promoters with dubious intentions only goes to show the significance of the problem and the need of the banking sector to rev-up and get its act together. 

With the slew of measures announced by the incoming RBI governor, the BankNifty has shown some signs of early pullback but it remains to be seen whether the effect is sustainable or is it only a short-term euphoria. In the long-term, what will help is strict surveillance to see only companies and individuals with good credit-ratings are given loans and bad apples are not allowed to enter the system.