Saturday, February 13, 2016

Crashing bank stocks: no cause for panic

India's public sector bank stocks have crashed following higher provisioning or expected higher provisioning at many banks. The higher provisioning follows directives from the RBI that banks fully recognise NPAs and provide for these.

It is natural for bank shares to drop in value as a result. There could be overshooting here, which again is natural in such situations. But a crash in stock values doesn't signify a crash in banks themselves. As the RBI governor has indicated, a few PSBs may end up with negative net worth but the rest will not. Many PSBs would still be meeting regulatory capital requirements. The RBI governor is right: "scare-mongering" by some in the analyst community is just not on.

However, all banks will have seen erosion in equity. This will undermine their ability to lend and grow. So, having got banks to provide fully for NPAs, it is incumbent on the government to provide enough capital. The RBI governor and the finance minister have indicated that banks will receive enough capital support. But this needs to be backed by solid allocations in the forthcoming budget. We cannot have banks providing for losses and suffering erosion in net worth without their capital position being fortified. The RBI must place in the public domain information about the capital adequacy position at various PSBs after capital infusion is announced or has taken place. This will serve to dispel apprehensions and should result in stock values bouncing back.

The interesting thing is that the panic is confined largely to the financial markets. Ordinary depositors don't seem worried and there's no sign of a run on banks anywhere. This is because depositors know that the government stands behind PSBs. That is one reason why public ownership in banking is good. In times of distress, we do not have depositor panic. Had we had any in the present situation, even the better placed banks would have tipped into bankruptcy.

Incidentally, Indian banks are not the only one facing a rout in the stock markets. Worldwide, bank stocks have plunged, as this story in FT makes clear. At banks such as Deutsche Bank and JP Morgan, attempts have been made to shore up market confidence through purchases (of bonds by Deutsche Bank and of shares by JP Morgan's CEO Jamie Dimon). Nor are Indian banks alone in trading below book value. This is true of a large number of US and European banks today. In a way, bank shares in India reflect the delayed impact on India (and other emerging markets) of the financial crisis.

To expect Indian banks to escape unscathed following this impact is more than a trifle unrealistic. By the same token, talk of mismanagement and bad governance at these banks is hugely overblown. There have been mistakes in lending. However, by and large, PSB stocks' fall reflects their broad exposure to crucial sectors of the Indian economy. If the economy and these sectors suffer, so will bank stocks. Period.


Unknown said...

Then why HDFc and other private banks not doing as badly as PSB? Is it not due to mismanagement and bad governance?

T T Ram Mohan said...

Private infrastructure funding, which drove India's growth in the period 2004-09, was done overwhelmingly by PSBs. Private banks, notably HDFC, kept their exposure to the minimum. This sector has run into trouble for reasons exogenous to banks- delay in clearances, problems with land acquisition, etc. This is one important reason for the rise in NPAs. Had PSBs stayed out of funding crucial sectors, we would not have got the high growth rate in the first instance.

It's incorrect to ascribe all NPAs to mala fide decisions.