Though public sector bank (PSB) stocks do not have a wide appeal among investors, Pandey expects them to do well in Thursday’s trade as PSBs may gain more from these measures.
What could help the banking sector is extending partial credit guarantee (up to 20 per cent of losses) of Rs 45,000 crore for non-banking financial companies (NBFCs) and opening up the special liquidity window of Rs 30,000 crore for investment-grade debt instruments issued by NBFCs.
These measures will help the liquidity-starved NBFC sector. But beyond a day of positive move in the stock market, Siddharth Purohit of SMC Capital, says investors will wait to see the total scheme of funding and its impact on the bond market. “That will guide the trajectory for banking stocks in the longer run,” he adds.
Nonetheless, Wednesday’s measures are fundamentally positive for banks. Focused clearly on providing some underwriting comfort to banks, Purohit feels it will eventually help in reviving lending activities and improve growth rate for banks. “While the earlier credit guarantee scheme did not see much success, banks will start lending at some time to manage costs. Compared to 2019-20, lending to MSMEs will improve,” says Purohit.
Private banks, though, in a bid to conserve capital may remain selective on lending to these sectors. Also, their lending decision will depend largely on whether they can earn higher yields - usually 200-300 basis points (bps) higher than PSBs.
Apart from MSMEs, Wednesday’s relief package has also touched upon other stressed segments, such as power and real estate, which is a positive for banking. While more may be needed to alleviate asset quality stress, Pandey feels a mention of these segments in the FM’s relief package indicates more could be on the anvil. But, will these relief measures take the asset quality stress off banks? Not quite, say analysts.
Avneesh Sukhija, senior financial analyst at BNP Paribas India, says he may not change his credit cost estimates for banks just yet.
After doubling his 2020-21 credit cost guidance from 98 bps to 193 bps in April, he says it is too early to assess the impact of these measures on asset quality. “Credit costs will be on the high side for the next two quarters,” he says. “While non-performing assets may reduce in the MSME segment, some banks may continue to provide higher for their exposure to cushion their asset quality,” he explains. Reserve Bank of India’s decision on extending the moratorium on loans will also play an important part in shaping the asset quality of lenders.
While Wednesday’s relief package sets the tone, more is needed for investors to turn positive on banking stocks.