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Banks Are Cleaning Up Their Books!
Mon, 15 Feb Pre-Open

The latest quarterly results of PSU banks have been disastrous. Thousands of crores of losses have shocked many. But not us. We have been talking about the threat of bad loans for years. Now the chickens have finally come home to roost.

The rot in PSU banks was deep. It took a determined effort on the part of the RBI governor to tackle the problem head on. It's safe to say that Raghuram Rajan is well on his way to stamping out the NPA menace. The RBI has mandated asset quality reviews (AQR) for the entire banking system. This has forced banks to disclose the full scale of bad loans on their books.

This is a truly wonderful development. Banks are now pro-active participants in this cleanup operation. The goal is simple: to be fully provisioned for all bad loans by March 2017. Once the process is complete, we believe PSU banks will be on the road to recovery.

So far banks had adopted the policy known as 'extend and pretend'. This means they did everything possible to ensure that loans given to favored corporate houses were not classified as non-performing assets (NPAs). These methods; corporate debt restructuring (CDR), strategic debt restructuring (SDR), joint lenders forum (JLF), 5/25 loan schemes, etc were misused by banks to hide the magnitude of the problem.

Now with full provisioning being done we see light at the end of the tunnel. We still believe that the March 2017 target is a difficult one to achieve. However, there is no doubt that genuine progress is visible and most of the cleanup will be complete by then.

This does not mean that investors should rush in to buy PSU bank stocks. As with any investment in the stock market, investors should follow a bottom-up process to identify the strongest PSU banks. This is because once the banking system recovers; we believe all banks will not rebound in the same way.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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