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Bank on this transition

With provisions peaking and rising hopes of an economic recovery, banks may be a good parking lot for patient investors

Saddled with bad loans, Indian public sector banks have been posting weak results over the past five years. Deteriorating asset quality and higher provisioning had clipped their wings. Profitability was dented, and capital erosion meant that the power to lend was stifled. Barring the retail-oriented private sector banks such as HDFC Bank, every large corporate bank — public and private — was struggling amid a stagnation of private investment. And just as the NDA government takes over once again, economic growth has hit a 20-quarter low of 5.8% in March 2019.

But a strong and stable government at the Centre is expected to revive the sector. Through its 2019 election manifesto, the ruling Bharatiya Janata Party (BJP) said it “recognises that investment-driven growth requires a cheaper cost of capital.” 

The credit scene has started seeing some traction. Data released by RBI in March 2019 shows that there has been an improvement. In March, non-food credit increased by around 13% YoY, driven by personal (16.4%) and service (17.8%) loans. Similarly, industrial credit also continued to grow, at 6.9% in March 2019 against 5.6% in February 2019.

While credit growth continues to pick up, public sector banks (PSBs) — capitalised by the government — are also on the recovery track. Their net NPA ratio could come down, allowing them to lend more freely in a benevolent economic climate.

Sorbh Gupta Associate equity fund manager, Quantum AMCBut, mutual fund managers warn investors not to paint all PSBs with the same brush. Sorbh Gupta, associate fund manager-equity of Quantum AMC, sees the current opportunity as a cyclical, and not a structural one. “PSBs may have reached a cyclical bottom, since credit cost as a percentage of advances is reducing,” says Gupta. Credit cost is provisioning done largely for bad loans. “Since the banks are also capitalised, they can grow again,” he adds.  However, public sector banks may lose market sh

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