Over the last few months, there have been several interesting news items about the banking sector, and most of these have been ignored by the markets. And the net effect could be a dramatic rerating of the entire bank sector.
Let's start with NPAs. These were once thought of as an intractable problem - with no possible solution. Even when measures like SARFAESI and the IBC were passed, it wasn't clear if these measures would be able to survive the threat and the delay from legal challenges. However, the resolution of Essar Steel and Uttam Galwa using these laws, clearly showed that the tide has changed. And this is not a small thing. Just the 2 deals already resolved, yielded about Rs 54,000 crores to the banks! And this was money that was already written down and provisioned for - so banks got a double boost. They can actually now use those provisions for cleaning up other loans, and use the money coming in from the deal to clean up their balance sheets further.
But more importantly, it is the message for the future. Suddenly, recalcitrant promoters are singing very different tunes. Vijay Mallya is now offering to pay back significant portion of the money - but even the Ruias tried to do same thing and were rebuffed by the banks, who decided to go the entire way, and collect more money from buyers.
We are talking of some really big numbers here - and in some cases, land acquired 20-30 years back is in play. This could be similar to the resolution of the Mumbai mills debt from the 60s and 70s where some of Mumbai's glitziest properties now sit.
To add to this, we have had a change in the RBI governor - clearly someone who is much more inclined to lean on the side of economic growth. At a time when trade war and other concerns are dampening global growth, it might be the best bet for India to focus on domestic demand led growth. And all the stars are aligned in that direction. Even crude, which was threatening to crash India's growth party, has tamed significantly. Inflation is now so low, that talk is of 2-3 rate cuts, instead of 2-3 hikes. The transformation in the economy, and the bell weather banking sector, will be immediate.
Because of NPA's and lending curbs, Indian banks hold almost 29% of their Net Demand and Time Liabilities in Government Bonds - well higher than the 19.5% they need to maintain for SLR reasons. The upcoming rate cuts augur well for the banking system, because these extra bonds will shoot up in price, giving banks huge profits.
All the brakes that were slowing down and stopping banks, look like they will be released at the same time. And the banking sector is set to fly.
I expect profits across the banking system to double in one year time, and quadruple in 4 years time. And this is extremely conservative - because just one deal - Essar Steel, is enough to almost double profits for this year!!
Let's start with NPAs. These were once thought of as an intractable problem - with no possible solution. Even when measures like SARFAESI and the IBC were passed, it wasn't clear if these measures would be able to survive the threat and the delay from legal challenges. However, the resolution of Essar Steel and Uttam Galwa using these laws, clearly showed that the tide has changed. And this is not a small thing. Just the 2 deals already resolved, yielded about Rs 54,000 crores to the banks! And this was money that was already written down and provisioned for - so banks got a double boost. They can actually now use those provisions for cleaning up other loans, and use the money coming in from the deal to clean up their balance sheets further.
But more importantly, it is the message for the future. Suddenly, recalcitrant promoters are singing very different tunes. Vijay Mallya is now offering to pay back significant portion of the money - but even the Ruias tried to do same thing and were rebuffed by the banks, who decided to go the entire way, and collect more money from buyers.
We are talking of some really big numbers here - and in some cases, land acquired 20-30 years back is in play. This could be similar to the resolution of the Mumbai mills debt from the 60s and 70s where some of Mumbai's glitziest properties now sit.
To add to this, we have had a change in the RBI governor - clearly someone who is much more inclined to lean on the side of economic growth. At a time when trade war and other concerns are dampening global growth, it might be the best bet for India to focus on domestic demand led growth. And all the stars are aligned in that direction. Even crude, which was threatening to crash India's growth party, has tamed significantly. Inflation is now so low, that talk is of 2-3 rate cuts, instead of 2-3 hikes. The transformation in the economy, and the bell weather banking sector, will be immediate.
Because of NPA's and lending curbs, Indian banks hold almost 29% of their Net Demand and Time Liabilities in Government Bonds - well higher than the 19.5% they need to maintain for SLR reasons. The upcoming rate cuts augur well for the banking system, because these extra bonds will shoot up in price, giving banks huge profits.
All the brakes that were slowing down and stopping banks, look like they will be released at the same time. And the banking sector is set to fly.
I expect profits across the banking system to double in one year time, and quadruple in 4 years time. And this is extremely conservative - because just one deal - Essar Steel, is enough to almost double profits for this year!!
