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    View: The haves and have nots of Indian banking

    Synopsis

    Private banks could begin to think that they are better off setting aside capital for potential defaults and recover through the bankruptcy process, however slow and ineffective it is, rather than getting into the merry-go-round of restructuring unviable businesses and end up with a wooden spoon.

    loanAgencies
    Investors tend to value those who are transparent in disclosing the rotten assets and set aside capital rather than the ones that hide to show paper profits for now, but explode in the future.
    Stocks have roared back after a near 40% selloff earlier this year as central banks did what they knew best – run the printing presses. This time a bit faster than before. The Nifty is up 48% from its March 23 lows and is down just 7% for the year. When it comes to banks, the story is different. Nifty Private Bank is down 33%, and the PSU Bank Index 43%.

    Why? Billionaire Uday Kotak, founder of Kotak Mahindra Bank, has the answer.

    ``One of the dangers to the financial sector and particularly - I mean, I sympathize with the investors and the analyst community - you may not know the truth for a long time,’’ Kotak said.

    With the blessings of the Reserve Bank of India (RBI), banks would set on a journey to restructure loans, essentially easing of payment schedule, of those who were squeezed by the lockdown. While the central bank may have put in safety clauses to avoid the repeat of past mistakes, hope and fear linger.

    Even the starting point is different this time. Wiser by experience, the RBI has mandated a timeline and prescribed penalties that could prevent the abuse of forbearance.

    Even before the moratorium is over, ICICI Bank has raised Rs. 15,000 crores in equity. The granaries of Kotak Mahindra Bank, Axis Bank and IndusInd Bank are also full to survive a long dry spell.

    The scene on the other side of the aisle is not pretty. State Bank of India has announced its intention to raise Rs. 15,000 crores of capital and its peers are set for the usual pilgrimage to New Delhi, which itself is financially stretched.

    Almost everything depends on the economic damage that the virus leaves behind. Rating company Crisil’s study shows that about Rs. 2 lakh crores of loans may be at risk.

    The Financial Stability Report, the bible for regulators, shows that under extreme stress overall bad loans could climb to 14.7% this fiscal, from 8.5% of loans last year. The difference between private and state-run banks is visible here again. For private lenders, it may rise to 8.7% while for the government-owned, it could soar to 16.3% from 11.3%.

    The higher the bad loans, the greater is the need for capital.

    Capital scarcity and the strategy to deal with it are also different. HDFC Bank’s effective moratorium is about 9 percent of book and it has provided Rs. 4,000 crores for Covid related stress. State Bank of India more than double its size with a moratorium of 11 percent of books has set aside Rs. 3,000 crores.

    When the regulator gets wiser, how far behind will the banks be? Would history dictate their behaviour?.

    The hurry with which private banks are raising capital signals that they are preparing to play a different game this time than they did in the previous cycle during which the co-operative federalism principle was dominant.

    All corporate lenders were sailing in the same boat - be it Axis or ICICI or SBI or PNB. It was in everyone’s interest that they restructure and hope for a miracle to revive those companies and get their money back. What happened to those lakhs of crores of restructured loans?

    Restructuring experience in the past has not been pleasant, with 70-75% of corporate restructured book, and 40-60% of non-corporate book ultimately becoming dud loans, estimates Nomura Securities analyst Amit Nanavati.

    When gods failed to answer their prayers, they paid a price in terms of poor equity valuations. Where do they learn from?

    HDFC Bank and Kotak Mahindra Bank stood out with investors giving them a valuation of four to five times the book value, while ICICI and Axis languished at less than two times. Many PSU banks still trade at a discount to book value.

    ``There’s a mutual disappointment,’’ SBI chairman Rajnish Kumar said recently of the valuation his bank gets from investors. ``We are disappointed with them and they are disappointed with us.’’

    This time round, why wouldn’t ICICI Bank and Axis Bank desire the valuations that HDFC Bank and Kotak Mahindra got in the previous cycle? Investors tend to value those who are transparent in disclosing the rotten assets and set aside capital rather than the ones that hide to show paper profits for now, but explode in the future.

    Private banks could begin to think that they are better off setting aside capital for potential defaults and recover through the bankruptcy process, however slow and ineffective it is, rather than getting into the merry-go-round of restructuring unviable businesses and end up with a wooden spoon. After all they have the capital now.

    Why would Sandeep Bakshi, or an Amitabh Chaudhry forgo the option of being an Uday Kotak or Aditya Puri?


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