Bi-monthly policy review: No cheer for banking stocks

NPAs are taking toll on the banking shares and hence, these are not performing as per expectations on the bourses. Even the leading public lender State Bank of India (SBI) is fighting all possible battles against the NPAs, but, mostly on the defensive.

Reserve Bank of India (RBI) is not happy with the incumbent state of banking economy of the country and looks forward to tame the threat through a monitoring committee, which will take to task the defaulters and other consortium lenders.

The seriousness in its approach could be witnessed in the discussion paper it came up with earlier, providing solutions to the problem of accumulating bad loans.

Nevertheless, the latest released bi-monthly policy review has nothing much in store for the bogged down sector to feel enthralled about. The central bank talks about keeping the policy rates at a status quo, until the Consumer Price Index based inflation declines to 8 per cent level in the current fiscal year, and then to 6 per cent in 2016.

It means the much needed room for the banks to grow has been cut, at least for now, and the NIIs (Net Interest Margins) are forced to remain where they were, for more days to come – in turn, narrowing the profitability margins of the banking sector.

Cost of funding is bound to stay high and despite banks wanting to lend not many interested investors may turn up for the show. Furthermore, the RBI has favored the lending of funds through term repos (7 day and 21 day) than the earlier prevailing overnight repo under the Liquidity Adjustment Facility (LAF). There doesn’t appear any chance of healthy arbitrage in such a scenario as well.

The central bank is not much happy with the restructuring of loans which is just a measure for not including losses in account books – however, the reality is otherwise.

The banking index or the Bankex has rallied considerably in the first three months of the present year with the BSE Bankex growing by 12 per cent.

Both the PSU banks and private sector banks have shown enormous improvement.

The return of confidence can be attributed to the fact that the market is waiting for the NDA government to emerge victorious in the 2014 Lok Sabha polls. It is also what’s leading to Foreign institutional Investors (FIIs) to invest heavily in the equities.

With the postponement of the Basel III norms further to 2019, and expectation of a government that can break down the existing policy paralysis situation in the country, the banking sector may see good old days returning back in the long terms.

However, for the short term, volatility and ambiguity in the market is ruling the roost.

But, Rupee is ultimately getting stronger, and this is more than enough for banks to take some confidence from.