Over the last few years economies across the world including India have been in a slow down mode and the sector to be most affected is the Banking industry as this sector is considered as a proxy of the economy. It is obvious that when the performance of the corporate sector is on the decline the banking sector is first to take the hit as loans turn into non performing assets and in many cases have to be restructured.
Banks are also faced with funding problems of the infrastructure companies as projects worth Rs 15 lakh crore are stalled due to lack of environmental clearance, land acquisition problems and the economy’s slowdown. Sector – specific problems, as in the power and iron ore sectors has further slowed orders. With finance cost rising, bankers have raised questions on how many infra companies will be able to repay their loans. Many banks are persuading companies to sell assets to reduce debts. The high cost of debt is forcing almost all infra companies to sell assets or go for debt restructuring. Huge defaults from several companies especially Kingfisher Airlines and Deccan Chronicle have further aggravated the problems at Banks and this phenomenon is mostly with pubic sector banks.
Therefore there are concerns that Public sector banks earnings growth in the October – December period is likely to be limited despite improving liquidity, ebbing cost pressures and steady loan growth offering some respite to lenders in an uncertain macro-economic environment.
The stock market gave thumbs down to public sector banks (PSB) stock in 2013. Their market capitalization fell 27% to Rs 276,997 crore at year end due to performance that fell short of market expectations. Public sector banks account for about 70% of loans and therefore have been hit substantially by a long spell of economic slowdown. The situation is expected to stay that way for at least for the first half of 2014. The economic slowdown stretched working capital cycles and higher interest rates have pushed many companies across sizes to the brink of default. The extent of rise in (NPA’s) has been unprecedented. According to the Reserve Bank of India data gross NPA’s of commercial banks have ballooned from Rs 94,121 crore (2.36% of the total) in March 2011 to Rs 2,36,245 crore (4.25%) by the end of September 2013. There is also pressure from restructured advances with ah high tendency to slip into default. The performance of PSB s on all parameters had gone down, such as profitability and asset quality. Slower credit growth leading to weakening of income, pressure on margins and higher provisioning on account of weakening asset quality impacted the profitability. Private sector banks by contrast were able to maintain profitability and asset quality. According to CARE’s estimates the overall gross NPA ratio for banks would be around 4.5% by March 31, with higher proportion coming from PSBs whose gross NPA ratio was estimated to rise around 5%. Further, the banks will have to provide more restructured assets in line with the new RBI norms. These factors would exert downward pressure on margins and are likely to impact profits for FY 14 by 25-30%.
However going forward the situation is likely to change for the better with most of the negatives that affected economies world over having been addressed to. In India the negative factors like Fiscal deficit, current account deficit, and policy paralysis have been addressed. Inflation still is an issue which has been high especially food inflation. Fortunately in the month of December food prices have softened and wholesale price inflation data is expected next week which will set the tone for the RBI to act on key policy rates.
In its previous policy meeting in December 2013, RBI had kept the interest rates unchanged. It however warned there may be a rise if inflation does not subside. Most of the negatives starring at the economy have largely been factored in the stock prices of public sector banks. As and when the economy turns around the returns from public sector banks could be substantial as most of them are currently quoting at steep discounts to their highs. However, the pain could continue in the short run though in the long run the outlook is positive.