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Sensex Opens Flat; Telecom & Energy Stocks Lag
Thu, 21 Feb 09:30 am

Asian stock markets are higher today as Chinese and Hong Kong shares show gains. The Shanghai Composite is up 0.4% while the Hang Seng is up 0.4%. The Nikkei 225 is trading down by 0.1%. US stocks ended higher on Wednesday after minutes from the Federal Reserve's last meeting reaffirmed for investors that the US central bank would be patient with respect to further interest rate hikes.

Back home, India share markets opened flat. The BSE Sensex is trading down by 2 points while the NSE Nifty is trading down by 4 points. Both, the BSE Mid Cap index and BSE Small Cap index opened up by 0.2%.

Barring telecom stocks and energy stocks, all sectoral indices are witnessing buying interest in the opening session with metal stocks and automobiles stocks leading the gainers.

The rupee is currently trading at Rs 71.03 against the US$.

In the news from the public-sector banks. The Centre has approved Rs 482.4 billion in capital for a dozen public-sector banks (PSBs), including Allahabad Bank, Corporation Bank and Punjab National Bank (PNB), taking its total infusion into state-run lenders to almost Rs 1 trillion so far this fiscal.

The move is part of the government's proposed Rs 1.1-trillion infusion into capital-starved PSBs in FY19 against Rs 881.4 billion a year before.

The entire infusion will be through recapitalisation bonds. It is expected to help PNB, Union Bank, Andhra Bank and Syndicate Bank avoid falling into the prompt corrective action (PCA) framework, apart from bolstering the capital base of various PSBs to facilitate greater lending to sensitive sectors like MSMEs and agriculture ahead of polls.

Similarly, higher capital could enable PCA banks such as Allahabad Bank and Corporation Bank to get out of the corrective regime.

Allahabad Bank's net non-performing asset (NPA) stood at 7.7% and Corporation Bank's touched 11.5% as of December 2018.

But with the large infusion, the ratio could be improved to 6% (net NPA above 6% is one of the triggers for PCA action) or below, the reports noted.

PSBs that have already exited the PCA (Bank of India and Bank of Maharashtra) will receive capital to avoid getting into it again, while some other weak banks like Central Bank, United Bank, Uco Bank and Indian Overseas Bank will get recap bonds to just meet regulatory norms.

In December 2018, the government had announced that it would provide an additional Rs 410-billion capital to PSBs this fiscal, over and above the budgeted Rs 650 billion.

However, despite the infusion of around Rs 2.5 trillion since 2014-15, the share of state-run banks in the market capitalisation of all banks has dropped sharply in the current NDA regime from around 42% in 2014 to just around 26% now.

Of course, without the government support, many of the bad-loan-hit banks would have fallen short of meeting their regulatory capital requirement. However, this has intensified calls for privatising weak PSBs and not just getting LIC to bail out some of them (LIC recently completely acquisition of 51% stake in IDBI Bank, saving the government the need to further capitalise the debt-laden lender this fiscal).

The finance ministry believes that the worst is over for the state-run banks and the recent improvement in their performance will be further bolstered by the infusion.

Speaking of recapitalisation of PSBs, we at Equitymaster believe, using recapitalisation bonds can only act as a short-term measure to the crisis afflicting Indian public sector banks today. Such a measure will not address the structural issue in the banking system, i.e. the poor standard of lending and poor governance system.

Recapitalisation of PSBs Over the Years

Our big picture editor, Vivek Kaul, talks about moral hazard risk arising out of recapitalization. He writes:

  • "If the government bails them around this time around, the banks know that they can count on the government bailing them out the next time around as well. And this means that they can follow fairly loose standards of lending, in order to lend money quickly."

Moving on to the news from pharma sector. As per an article in a leading financial daily, Dr Reddy's Laboratories re-launched its Buprenorphine and Naloxone Sublingual Film in the US market after a favourable court ruling.

Buprenorphine and Naloxone Sublingual Film, 2 mg/0.5 mg, 4 mg/1 mg, 8 mg/2 mg, and 12 mg/3 mg, is a therapeutic equivalent generic version of Suboxone (buprenorphine and naloxone) sublingual film.

The re-launch comes on the heels of a favorable ruling in a patent litigation by the United States Court of Appeals for the Federal Circuit.

Reportedly, the Indian drug major had booked sales of around US$10-15 million days after its launch in July before it was stayed by the court.

To know more about the company, you can access to Dr. Reddy's Q2FY19 result analysis and Dr. Reddy's Stock Analysis on our website.

Dr. Reddy's share price opened up by 0.5%.

And to know what's moving the Indian stock markets today, check out the most recent share market updates here.

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

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