Delay in regulatory leeway likely to prove costly affair for banks

With loan growth and asset quality likely to take a hit, FY21 earnings estimates are coming under the knife

The sharp rally in banking stocks, which rose 10-12 per cent, in the first half of Thursday’s trade did not sustain fully as hopes of relief or bailout measures for the sector from the finance minister did not materialise. The minister though has kept the option open for more relief measures as and when needed, which suggests that some relaxation (from the Reserve Bank of India or RBI) on asset classification norms (critical for classification of non-performing assets or NPA) may come through for the sector. While hopes of some relief have been around for over 10 days, any further delay could prove costly for banks. Analysts are already downgrading their earnings expectations, with private banks likely to see a sharper cut. In fact, an across-the-board earnings downgrade is also the first of its kind for private banks.

The nation-wide lockdown, which was initially to be more a problem for small and medium enterprises (SME) exposure of banks, is beginning to spread. “The current pan-Indian lockdown will certainly affect cash flows of borrowers, both individual and corporate, which may lead to an increase in corporate as well as retail NPAs,” say analysts at ICICI Securities. “The lockdown will adversely impact most sectors and may not be restricted to chemicals, textiles, electronics, and entertainment,” they add.

The last time when banks received dispensation on asset recognition was in 2016, after demonetisation. The RBI gave a 90-day window for classifying certain retail loans as NPAs. “Without a similar dispensation being extended from the March quarter, banks could find it very difficult to sail though,” said a top executive of a state-run bank. Another senior banker said unless such dispensations are soon given, it may be difficult, especially for private banks, to lend support to customers. While most state-owned banks have come out with special schemes for their customers battling the lockdown, private banks are yet to act. “The longer it takes to roll out these relief measures, the prolonged will be the period of dull growth for banks,” he adds while mentioning that business volumes have been quite negligible in the last two weeks.

Investors need to remember that loan growth has been pale at single-digit in CY20, so far. Therefore, unless the RBI temporarily relaxes its NPA norms, banks may find the going getting tougher. PhillipCapital estimates that NPAs could rise by 250 basis point for the sector if relaxations are not given.

Thus, “Until there is clarity on the sort of dispensation the RBI is willing to roll out, investors should not be fancied by the steep correction in banking stocks,” says a research analyst of a foreign brokerage.