With nearly 31 per cent weightage in Nifty50 as of July 30, banking and financials is one sector that generally act as a 'make' or 'break' for the performance of benchmark index Nifty50. With the announcement of Urjit Patel being selected as successor to the outgoing Reserve Bank of India (RBI) governor Raghuram Rajan, the sector could play a key role in influencing the market direction.
We have compiled six reasons why banking sector will be the most watched out over the next 12 months:
1) Policy continuity at RBI
Most analysts agree the elevation of Patel as the next RBI top brass is a hint at the continuity of the ongoing monetary policies at the RBI. An inflation hawk like Rajan, Patel is unlikely to root for reducing policy rate in the next monetary policy meet scheduled for October 4. This is in the background of firming consumer price inflation, which in July rose to a two-year high of 6.07 per cent. This was well above the RBI's target of 5 per cent. There may thus be no relief for banks on the interest rate front in the coming quarters.
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2) Governor no longer the sole arbitrator of rates
Another important transformation is an adoption of a rate setting committee named Monetary Policy Committee. This Committee will take a collective call on interest rates. Until now, only the RBI used to be the sole arbitrator of interest rates. But the new Committee will comprise of three members each from the central bank and the government, with Urjit Patel having the casting vote.
3) Rate transmission and stubborn state banks
One of the gruelling challenges that successive RBI governors have faced is to push banks to transmit recent cuts in interest rates to borrowers. Under Rajan, the RBI has cut lending rates by 150 basis points (bps). But banks have only lowered their rates by roughly half of that. They say they can only accommodate another 10-15 bps cuts more in coming months, given higher provisions they are expected to mark against bad assets.
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4) Bleeding balance sheets on bad loans
Data available with database AceEquity showed the bad loans of PSU banks soared to about Rs 5,71,500 crore by June 30 from Rs 2,85,750 odd crore as of March 13. Private banks were also under pressure with 68 per cent rise in gross NPAs from Rs 34,805 crore last year to Rs 58,331 crore this year. Patel may turn out to be less aggressive than Rajan to fight the bad loan issue, but that does not mean there would be any relief to banks in the coming quarters.
5) The big bank theory
Now that SBI got approval to merge its associate banks with itself, the saga of merger and acquisitions has just begun in the banking sector. A Reuters report in June claimed other than SBI, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda and Bank of India may lead the merger. Syndicate Bank, IOB and UCO Bank may be merged with Canara bank, while Central Bank and Dena Bank may be merged with Union Bank. Other banks like Andhra Bank, Bank of Maharashtra, Vijaya Bank may be merged with Bank of India, the report said citing government sources.
6) Bank capitalisation
The government last month announced a sum of Rs 22,915 crore for recapitalisation of 13 public sector banks. SBI is to receive the largest allocation of Rs.7,575 crore. Indian Overseas Bank and Punjab National Bank are to get Rs 3,191 crore and Rs 2,816 crore respectively. Moody's Investors Service recently said this infusion may provide some respite to the public sector banks (PSBs), but their capital needs are significantly higher than the budgeted amount.