X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Is the worst over for Indian banks? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jul 16, 2014

    Is the worst over for Indian banks?

    Banks constitute the backbone of a nation's financial system. And there is no denying the fact that the health of the economy is a mirror reflection of the banking system. Be that as it may, the economic downturn however has led to formidable challenges for the banking sector. Current slowdown- global and domestic, persistent policy logjams, delayed clearances of various projects, aggressive expansion by corporate during the high growth phase and more have left the banking system in a state of limbo. Banks have been victims of bad loans and capital insufficiencies over two years now.

    While the nation applauded the change in guards at the centre, high hopes have been built-up for a turnaround in the system. And the picture seems to be turning. Albeit gradually! While it is too early to say the worst is behind for the banking sector, the recent Financial Stability Report release from the Reserve Bank of India (RBI) suggests a slow recovery is underway.

    Indian banks are giving a best shot in repairing their balance sheets. Banks' average capital to risk-weighted assets ratio (CRAR), that provides a glimpse of the bank's long-term stability, has gone up from 12.7% to 12.9%. Not just that! The total stressed advances i.e. non-performing assets (NPAs) + restructured loans have come down. That they have been pared from 10.2% in September 2013 to 9.8% in March 2014 is a good sign if nor great. There has been a perceptible decline in the rate of slippage of standard loans into NPA category too. And with sales of bad loans to asset reconstruction companies (ARCs) gaining grounds, the asset quality is expected to gradually improve in the sector.

    So is the worst over for the banking sector?

    Certainly not! The NPA ratio over 9% of loan book is certainly high by all standards.

    What's more complicating for the banking system is that it still suffers from weak credit growth. Below 14% credit growth in 2013-14 as against whopping 17%-18% over the preceding five years is rather worrisome. This may be an outcome of the conscious effort from the banks to pare down exposures to the troubled sectors of the economy. But on the flipside, capital constraints are also to be blamed for the inadequate credit expansion in the system. And if that's the case, then the economic recovery is still distant. True, that the Indian banks unlike their global counterparts have not yet experienced a major banking crisis. Even the RBI's Report pointed out that. However, challenges on the asset quality and capital adequacy fronts will persist.

    There is no doubt that Indian banks particularly the PSUs ones are still short of capital to support their credit requirements. And the much needed credit growth can only uplift the saddled economy and in turn boost the investment cycle.

    What is in store?

    The Union Budget 2014-15 has to a certain extent helped addressing the banking sector concerns. Citing that financial stability is the foundation of a rapid economic recovery, greater emphasis has been laid out on strengthening the banking sector in the budget. However that is a lengthy process. While the RBI Report forestalls a recovery, it spells out caution too. It candidly states the challenges haunting the Indian banks for the coming quarters. Besides capital needs and asset quality, profitability and more importantly, the governance and management processes continue to add woes to the Indian banks. And public sector banks stand more vulnerable.

    What should investors do?

    While banking stocks should definitely form part of your investment portfolios, cherry-picking quality ones is the key. Familiarizing oneself with the key criteria for analyzing banking stocks would be a good start. Further it is important to know that price to adjusted book value and not price to earnings is a better method of valuing banking stocks.

      Tanushree Banerjee (Research Analyst), is the editor of ValuePro, The India Letter, and Stock Select, Equitymaster's oldest recommendation service. She is also the editor of Equitymaster's most popular newsletter read by over 200,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks along with scrutinizing the RBI policies. And over the last decade, developed our research processes that have helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham and Joel Greenblatt.

     

     

    Equitymaster requests your view! Post a comment on "Is the worst over for Indian banks?". Click here!

    3 Responses to "Is the worst over for Indian banks?"

    K. Balasubramanian

    Jun 16, 2015

    Sir,
    The proposals of RBI -Governor will not help save PSU- Banks from the impending financial disaster . The ARCs , that bought NPAs of Banks at a steep discount , could not realise even 50% of the cash that they offered . CDRs cannot revive dead-patients . They may help a patient in coma . But many of our Corporate -patients are in deep coma , with very little chance of a revival . Bhushan Steel , JSPL , are cases in coma-stage . But cases like Winsome Diamonds , Kingfisher , Resurgere , Surya Pharma , K.S. Oils & scores of such Companies are bodies kept in ICUs , as is the practice in unscrupulous Hospitals ! The patients were dead long back , but they are kept in ICUs so that the bodies do not decompose , and the Hospitals can extract more money from anxious relatives ( Investors/ Bankers ) , by inflating ICU bills . The proposal to convert NPAs into Equity is ridiculous and would again benefit the unscrupulous Promoters only . As an example , the NPA of IVRCL Ltd was converted into equity at a price of 22.50 when the market-price was only 14+ , which is now Rs. 9.65 ! The JLF has lost heavily . Also , of what earthily use is to takeover the Management of a Company , like Winsome Diamonds , when what is leftover are a few dilapidated buildings and broken show-cases of the Jewellery , with the showcases not having even imitation-jewellery ! The price of this Company is a mere 65 paise/ share !. Of what use , will be the Factory-sheds of these dead Companies when Machineries were already sold out ? ( eg. South India Viscose Factory / HPF in Ooty .) The only way to save PSU -Banks are to implement the following steps in earnest . (1 ) . The Loans must have Collateral security to the extent of 10% of the Promoters -component in Equity , from the personal properties of the Promoters . Eg. promoter equity is 45 % in Paid-up Capital . Then if the Loan sanctioned is say, 200 crores , then 4.5% of the loan , must have been secured from personal property of the Promoter. ( Rs. 9 crores ). (2). The Auditors of the Company must be voted to Office by a majority of the Non-promoter holders , & to be ratified by the Bankers if the loan-exposure is more than the Equity ( Debt- equity of more than 1 ) ( 3) . The promoters salaries , including that of relatives , B-in-Law/ S-in- Law of CMDs are to be ratified by the Min. of Company Affairs . ( At present the higher-ups in MCA are enjoying an affair with the Corporate Sector , which must be checked with an iron fist ! ) (4) . The JLF / Lender-bank must demand a Quarterly report on loan utilisation ( LUR for each quarter ). This will check buying of properties by the Promoters in London / Dubai / Singapore/ other European capitals, using Bank-finance . Many promoters may deny this , as expected . Properties in other World capitals have appreciated with loans to Corporate Sector in India , as huge money is made in capex expenses & acquisitions with Bank-funds , by these Promoters. ( 5 ) Bank-secrecy clauses must be thrown to winds by the Employees of banks if they want their Bank to be saved from the pick-pockets of the Corporate Sector . Let us always remember that the PSU Banks are marching to join the ranks of GTBL ( Global dis-Trust Bank Ltd ) , at a hectic speed . If timely action , already it is high time , is not taken by RBI , their untimely collapse is imminent !! Jai Hind !!!

    From : K. Balasubramanian , S-1/ F-2 , PGP Village , Singanallur (p.o) Coimbatore-5 . Ph. 0422-2971726 . Mob.:: 94423 37067

    Like 

    paultc

    Mar 24, 2015

    Why is the government or the banks not recovering the NPAs. Shouldnt there be a fool proof system to check the colateral or pledges of borrowers and if they do default, the government should have strict laws to immediately auction off or recover the money one way or the other OR should there be private Debt Collectors to whom the banks can sell their NPAs to.

    Like (2)

    IndianMoney.com

    Jul 18, 2014

    The Indian banking sector of late is doing well.However a high NPA ratio means that banks need to be wary.They are not yet out of the woods.Banks have yet to recover a huge amount of loans.
    Banks can now focus on the home loan segment and the affordable housing segment and shift focus from corporate lending.

    Like (4)
      
    Equitymaster requests your view! Post a comment on "Is the worst over for Indian banks?". Click here!
     

    More Views on News

    IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

    Aug 10, 2017

    IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

    ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

    Aug 10, 2017

    Asset quality will be the key thing to watch out for going forward.

    Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

    Jul 31, 2017

    Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

    Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

    Jul 6, 2017

    Does the stock score on the value versus price equation?

    AU Small Finance Bank Ltd. (IPO)

    Jun 27, 2017

    Should one subscribe to the IPO of AU Small Finance Bank Ltd?

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE BANKEX


    Aug 18, 2017 (Close)

    MARKET STATS