BANKING ON BANK

Banks after underperforming year till date are likely to outperform once again and continue with their long term trend.

- IE&M Research Team

The Nifty Bank has largely underperformed the frontline index Nifty at the start of FY21. Since the start of FY21 Nifty Bank is up by 106 per cent while Nifty is up by 113 per cent. Nevertheless, in the last month, Nifty Bank has been trying to cover up the lost ground. In the last one month Nifty Bank is up by almost 2.5 per cent compared to 1.5 per cent by Nifty. There is a sequence of events and factors that is leading to such outperformance by the Nifty Bank.

Bad Bank to Solve Some Structural issues

Last month, to tackle the growing problem of mounting bad debts in the banking sector, Union Finance Minister Nirmala Sitharaman announced the setting up of National Asset Reconstruction Company Limited (NARCL) under the Companies Act. It thus delivered on its promise to set up a ‘bad bank’ to clean up the balance sheets of commercial banks. Under the new setup, the NARCL will take over loans worth almost Rs 2 lakh crore from the books of commercial banks at a mutually agreed price. The NARCL will pay 15 per cent of the price of these loans upfront in cash to banks and then issue security receipts in lieu of the remaining amount.

The NARCL will then try to resolve these bad loans in a time-bound manner with help from the India Debt Resolution Company Limited (IDRCL). In case the IDRCL is unable to sell these bad loans at a satisfactory price to make good on the security receipts, the Centre will step in and fund the gap, but within a budget limit of Rs 30,600 crore. Indian banks and especially public sector banks have been facing the NPA problem since 2014 without any long-term fixes on sight, however, the formation of NARCL and IDRCL is likely to give a stable solution to this. Besides, it will also help banks to free up some liquidity that will help them in credit growth.

Moody’s raised the rating outlook for 9 banks