Woes and Worries

Mutual fund managers have plenty of concerns and fresh bad loans are right on top

The country is reeling under a liquidity crisis and you know it’s not getting any better when the central bank goes all out to ease liquidity – the RBI recently lowered the repo rate by a quizzical 35 basis points. While the transmission of lower rates to borrowers is in question, the June quarter performance of lenders has been better than other sectors. “Net interest income (NII) of 10 BFSI companies (Nifty constituents) grew by 14.3% YoY, whereas net profit grew by 149.9%,” states a Centrum Research report. A low base effect, clean-up of balance sheets and recapitalisation by the government has led to this outperformance.

Naturally, mutual funds and investors have turned overweight on the sector. But the dismal growth in core sectors (electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilisers) and an ongoing slowdown in the economy could still play spoilsport. The bad loan cycle seems to have peaked, but the further economic slowdown may lead to a new round of defaults in the banking sector.

And to understand the mood of the market, Outlook Business conducted a survey in the last week of August (See: Dawn after dark?). What we found was that a fresh wave of bad loans is the single biggest domestic risk according to 45% of mutual fund managers.

“If new and chunky bad loans emerge, it can be risky for banks’ earnings growth and overall markets,” says Pankaj Tibrewal, equity portfolio manager and senior VP, Kotak Mutual Fund. New NPAs could in fact hamper banks’ ability to lend and could hurt small and medium enterprises (SMEs) and large corporates.

“Over the past nine months, NPAs have risen following the IL&FS default. No one was able to predict this. My biggest fear is that a fresh set of bad loans can cool down the whole economy,” says Vinit Sambre, head of equities, DSP Investment Managers.

Consumption conundrum

If bad loans are the scary monster under the bed, then consumption slowdown is the poltergeist that refuses to vanish, creating havoc every now and then. That’s another headache for investors right now, as India’s Primary Consumer Index dropped by 3.1% in August, weighed down by high cost of living, weak economic growth and shortage of funds for spending and investment. One of the m


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