Indian banking poised for revival in 2021

Indian banking has weathered the pandemic storm of 2020 and is poised for a revival in 2021. The improved outlook is reflected in the rally in banking stocks. All right, the stock market may be experiencing a bit of a bubble. But the fundamentals tell the same story. The bad loan problem has been largely dealt with- through aggressive provisioning and through recapitalisation of banks.

The RBI's Financial Stability Report of January 2021 has some gloomy projections based on stress tests it has carried out. The RBI's stress tests show that, in a baseline scenario, bad loans could rise from 7.5 per cent in September 2020 to 13.5 per cent in September 2021. In an adverse scenario, bad loans could rise to 14.8 per cent for scheduled commercial banks as a whole. For public sector banks (PSBs), the scenario could be worse.

The RBI qualifies these estimates with caveats:

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.” The RBI also introduced a caveat in its stress test for ban

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 By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions. It is emphasised that model outcomes do not amount to forecasts.

....considering the uncertainty regarding the unfolding economic outlook, and the extent to which regulatory dispensation under restructuring is utilised, the projected ratios are susceptible to change in a nonlinear fashion.

In other words, with loan restructuring and other forms of forbearance, the  bad loan ratios may not be that bad. 

I am willing to bet they won't be. I have seen the estimates of market analysts. Some of them estimate bad loans at about half the level of 13.5 per cent indicated by the RBI's base line scenario. Many bankers felt at the height of the pandemic that bad loans could rise by up to 50 per cent over the previous year. A 50 per cent rise over 7.5 per cent amounts to around 11 per cent. That was before we learnt that the Indian economy is recovering faster than thought and that very firms have opted for loan restructuring.

I notice that KV Kamath is also inclined to an optimistic view: 

Kamath said one should overreact and talk about bank capitalisation and cleanup, which he believes has already been done.

Hand-holding might be required, but that is completely different from cleanup. Recapitalisation of banks (by the government) has been done, and nothing has been broken, because banks have been prudent and continue to make provisions. Having said that, had a large number of corporate restructuring happened, there would have been noise in the market. There is no noise in the market.

In a recent article in BS, I set forth the reasons I think 2021 will be a year of recovery for Indian banking:

• GDP growth of 10 per centin 2021-22 will translate into credit growth of 15 per cent. This will boost bank bottom lines
• Thanks to increased provisioning, NPAs were down to 2.8 per cent in March 2020. 
• We will be about ten years into the banking crisis in 2020-21. That's a long enough time to emerge from the crisis given that the typical banking crisis, according to Reinhart and Rogoff, lasts eight years

I also argue that the impending improvement in banking, including at PSBs, means that the recipes for banking revival given so far - a bad bank, a Bank Investment Company, wholesale privatisation- are not meaningful. 

It makes more sense to recapitalise PSBs, wait for an improvement in valuations and attempt strategic sales in two or three PSBs as an experiment. Wholesale privatisation and a fall in government shareholding below 50 per cent will jolt depositor and investor confidence in Indian banking at a time when the outlook appears promising.

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.” The RBI also introduced a caveat in its stress test for ban

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

 

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint

By design, the adverse scenarios used in the macro stress tests are stringent conservative assessments under hypothetical adverse economic conditions,” the RBI said. “It’s emphasised that model outcomes do not amount to forecasts.”

Read more at: https://www.bloombergquint.com/economy-finance/rbi-fsr-bank-bad-loans-could-rise-to-135-by-september
Copyright © BloombergQuint