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After opening the day on a positive note, the Indian indices witnessed losses and are presently trading marginally lower. Sectoral indices are trading on a mixed note with stocks from the realty and capital goods sector witnessing maximum selling pressure. Consumer durables stocks are, however, trading in the green.
The BSE Sensex is trading down 30 points (down 0.1%) and the NSE Nifty is trading down 5 points (down 0.1%). Both - the BSE Mid Cap index and the BSE Small Cap index - are trading flat. The rupee is trading at 67.02 to the US$.
As per an article in the Economic Times, the government is drawing up a contingency plan to support state-run banks (PSBs) should they collapse under the burden of burgeoning bad loans. For this, the government is prepared to pump in an amount equivalent to 3% of GDP. This share, however, is noted as far exceeding the capital that it has currently pledged to infuse in banks.
The contingency plan is drawn on the back of rising stressed assets that are seen rising to Rs 12,000 billion. As of present, the total stressed assets in the banking system stand at about Rs 10,000 billion.
Public sector banks (PSBs) in India are lagging far behind their private sector peers. The recent data released by the Reserve Bank of India (RBI) showed that the total bad loan ratio of the state-run banks has ballooned to 11.4% in the 15 months since March 2015. On the other hand, during the same period, private banks' bad loans have risen from 2.2% to 2.8%.
Owing to this bad loan problem in the PSUs, the RBI has called for reforms in PSU banks. Some of the major reforms proposed by the RBI include the dilution of government stake in PSUs below 50%, extending CEO tenures to five years and providing managerial autonomy to banks.
All of the above proposals were made by RBI deputy governor S S Mundra in a speech on Wednesday where he stressed on how PSBs have continued to drive the deterioration in the asset quality of the banking sector in the first quarter of FY16. When and how these proposals will pan out remains the test of time.
However, there remain many concerns for the Indian economy if the problem of bad loans at PSUs continues to lag. Vivek Kaul, editor of Vivek Kaul's Diary, had written about the mess at PSUs and how it remains one of the major problems for the Indian economy in many of his articles. He's also explained why the government shouldn't be running 27 public sector banks.
And this problem is just one part of the puzzle. Vivek Kaul has spotted a trend which he thinks has the potential to derail India's long-term growth story. Apart from the rising bad loans in PSUs, there are many macro trends that could directly impact you and your family. These are the big issues like the government's handling of oil prices, India's disastrous jobs situation, the current state of India's real estate bubble...and a lot more!
In fact, as you read this, Vivek has just come out with a full note that details all...including how this trend could impact you.
Click here to know more.
In another news update, the Reserve Bank of India (RBI) has announced an array of changes that are aimed at widening and deepening India's corporate bond market. These include the staggered reduction of banks' loan exposure, increased participation by overseas investors in corporate bonds and making top rated bonds eligible for borrowing from the RBI for liquidity needs.
Apart from the above, the central bank also kept the avenue open for overseas rupee-denominated long term masala bonds to bank. These are introduced as a means of shoring up their dipping capital and financing infrastructure and affordable housing.
For the above changes, brokers have been allowed to participate in the corporate bond repo market to act as market makers. All of the above measures are announced days before Rajan retires as the RBI Governor.
Being on the topic of bond markets, Tim Price, in one of the recent articles from Vivek Kaul's Diary, has explained why the global bond market is broken. By doing so he has stated that the ultimate breakdown from this environment will be worse than the first dotcom bubble.
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