India banking sector set for two important events: (a) one-time Loan restructuring of Covid-19 impacted borrowers (b) Bringing entire public deposit taking financial intermediation institutions - SCBs, NBFCs, HFCs and all types of Cooperative banks - under @RBI regulation...1/n
What’s the impact of one-time loan restructuring? Relief from moratorium ends by end August and repayment of set-aside amount as term loan needs to be repaid before 31/3/2021 which is tough ask, hence need for restructuring to arrest spike in GNPA by end of FY21 into FY22...2/n
Pre-Covid GNPA of Banking sector is ~10% (higher for PSU banks, obviously) and NNPA is ~5% with PCR of ~50%; Assuming that 50% of performing loans will go under stress post C-19 in FY21 from cashflow issues, it’s alarming GNPA number wiping out capital of most banks....3/n
It’s unavoidable “action” (to avoid collapse of banking sector) when there’s no bandwidth to supply capital to financial intermediation ecosystem through GOI sponsored fund structure (to absorb C-19 NPAs) or directly to borrowers (in combination of debt & equity structure)...4/n
While awaiting to hear on the formal announcement from @FinMinIndia and @RBI on terms & conditions of “restructuring of C-19 NPAs”, need to see extent of qualified borrowers as beneficiaries, amount of haircut & sacrifices on lenders and tenor of moratorium buying more time..5/n
Assuming that execution part goes well, and Gross & Net NPA maintained at FY20 levels, what’s impact on balance sheet? (a) top-line loan portfolio will move up on existing book from enhancement (b) excess liquidity in banks books will help to arrest spike in C/D ratio...6/n
(c) given urgency to build incremental credit growth, liquidity dynamics may change shifting operating policy rate from R/R to Repo rate, pushing LAF corridor to 3-3.5% (d) interest recognition and General & specific provision norms on C-19 restructured portfolio can hit P&L..7/n
(e) All Banks need to prepare for capital raising to accommodate this one-time action when resolution if any on most borrowers is 2-3 years away (f) lower EPS from higher equity base (losing advantage of high share premium) is downside pressure on market cap & P/B multiple..8/n
So, it’s caution on Banks till scheme of reconstruction is announced, and more importantly effectiveness on execution ability of banks, and better clarity on its impact on ROA, PAT, CAR, LCR and EPS; given the size of C-19 moratorium portfolio, it’s medium term wait & watch...9/n
What’s the impact on #banknifty? Good that top-quartile Big7 banks (SBI/BOB/PNB and ICICI/HDFC/Axis/Kotak) will be least impacted but doesn’t mean that these are going to drive the index up; there’s no clarity on other banks (barring few) on ability to absorb B/S impact...10/n
#banknifty 2-step rally from 17000 & 19500 to 21850/22500 is impressive despite being away from 2019 close 32161 & end 2019 all-time high 32613; It’s good to retain big-picture at 16000/19500-21350/22000 till liquidity support intact - don’t expect 24350 to come into radar..11/n
Bringing all public deposit taking financial intermediaries under @RBI regulatory supervision is major structural step, when each category is different animal on ownership & management and compliance & governance standards! Good move to improve effectiveness & efficiency...12/n
Lots happening under @DasShaktikanta leadership, and this one is very important action to bring banking & financial intermediation sector to above par standards across all parameters -productivity, profitability, efficiency, compliance, governance, customer service etc...13/n
We saw consolidation of SBI & its subsidiaries, then amongst PSU banks (through forced mergers) and now on cooperative banks structure; it’s not going to be easy given political linkage and pathetic state of balance sheet accommodating loan waivers & other inefficiencies...14/n
It would obviously need state level consolidation with apex bank with linkage to PSU bank (joint ownership model) and would be interesting to see how PCA norms are met, and simultaneous execution of C-19 restructuring & cooperative banks into mainstream is mammoth task...15/n
Another important factor is @RBI bandwidth for regulatory supervision on compliance & governance! Despite effective process of CAMELS (Capital, Asset Quality, Management, Earnings, Liquidity and Systems), failure rate of banks since 2000 is high with huge cost to exchequer...16/n
All combined, while the decision is much needed (better late than never), it would need top-class tactical & execution standards (on balance sheet related issues and strengthening regulatory supervision bandwidth & decentralisation) to make it effective! Good luck....17/17
