India Financials

Saumya Agarwal

Thematic (Sector/Industry)

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure due to multiple factors playing out such as Moratorium, the Supreme Court interim order and the Restructuring framework. How well placed are Indian Banks to ride the current stress cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure due to multiple factors playing out such as Moratorium, the Supreme Court interim order and the Restructuring framework. How well placed are Indian Banks to ride the current stress cycle?

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

Equity Bottom-Up

Last month, IDBI Bank announced the draft scheme for setting off its accumulated losses against the Share Premium account balance. As per IDBI Bank, this accounting re-arrangement will help represent its true financial position and also benefit shareholders in the long run. Though not commonly used, this kind of accounting exercise is not 'first-of-its-kind' for an Indian Bank. Can this accounting move really be a game changer for IDBI Bank?

Last month, IDBI Bank announced the draft scheme for setting off its accumulated losses against the Share Premium account balance. As per IDBI Bank, this accounting re-arrangement will help represent its true financial position and also benefit shareholders in the long run. Though not commonly used, this kind of accounting exercise is not 'first-of-its-kind' for an Indian Bank. Can this accounting move really be a game changer for IDBI Bank?

IDBI Bank: Can ‘setting-Off’ the Accumulated Losses Be a Game Changer for IDBI Bank?

Specialist in Indian Banking and Economic Research

Hemindra Hazari

Macroeconomics

The stock market has responded euphorically to India’s central government budget for the fiscal year 2021-22 (April-March). The question is: does this indicate that investors anticipate a revival of investment, employment, and GDP growth? Paradoxically, it may not. While investment in the macroeconomic sense may not increase, and GDP may take some time to come back to its pre-Covid levels, it appears that the market is unconcerned. The reason is that it anticipates a rise in corporate profits as a result of the measures in the budget, and it is excited about the government’s tough stance regarding reforms.During a severe economic slowdown, such as what India is currently facing, large scale privatisation of the public sector is unlikely to stimulate growth. The private sector typically is focused on short-term profits, and in an environment where aggregate demand is constricted and capacity utilisation is low, the private sector cannot be expected to undertake capital expenditure. It is only the government and government-owned companies which can play a counter-cyclical role in the economy in a downturn. The privatisation of the public sector would likely result in cost cutting to generate higher profits, instead of stimulating the economy. The Indian prime minister’s statement in parliament that “improper words against the private sector…[and] the culture of abusing the private sector” may not be tolerated indicates that the government now aims to bring about a major change in the political culture of India. Indeed, just as various dissidents, protesters and even comedians have been charged with serious offences against the state, it is possible that those alleging private corporate firms with corruption may face similar charges. This is intended to carry through unpopular reform measures with a minimum of opposition.Given the vulnerable state of some government banks, the proposed privatisation of two government banks may not yield much revenue. In such a scenario the purpose of privatisation may be to send a signal to international investors and the capital market of the government’s tough reform credentials, rather to raise substantial budgetary resources. The central role now given to the private sector as “wealth creators” at the vanguard of the economy may not result in the stated outcome of higher investments, employment and growth. But it may boost corporate profits, especially at the top of the corporate sector, even if the rest of the economy may actually decline. It is this boost to corporate profits that appears to have enthused the share market.

The stock market has responded euphorically to India’s central government budget for the fiscal year 2021-22 (April-March). The question is: does this indicate that investors anticipate a revival of investment, employment, and GDP growth? Paradoxically, it may not. While investment in the macroeconomic sense may not increase, and GDP may take some time to come back to its pre-Covid levels, it appears that the market is unconcerned. The reason is that it anticipates a rise in corporate profits as a result of the measures in the budget, and it is excited about the government’s tough stance regarding reforms.During a severe economic slowdown, such as what India is currently facing, large scale privatisation of the public sector is unlikely to stimulate growth. The private sector typically is focused on short-term profits, and in an environment where aggregate demand is constricted and capacity utilisation is low, the private sector cannot be expected to undertake capital expenditure. It is only the government and government-owned companies which can play a counter-cyclical role in the economy in a downturn. The privatisation of the public sector would likely result in cost cutting to generate higher profits, instead of stimulating the economy. The Indian prime minister’s statement in parliament that “improper words against the private sector…[and] the culture of abusing the private sector” may not be tolerated indicates that the government now aims to bring about a major change in the political culture of India. Indeed, just as various dissidents, protesters and even comedians have been charged with serious offences against the state, it is possible that those alleging private corporate firms with corruption may face similar charges. This is intended to carry through unpopular reform measures with a minimum of opposition.Given the vulnerable state of some government banks, the proposed privatisation of two government banks may not yield much revenue. In such a scenario the purpose of privatisation may be to send a signal to international investors and the capital market of the government’s tough reform credentials, rather to raise substantial budgetary resources. The central role now given to the private sector as “wealth creators” at the vanguard of the economy may not result in the stated outcome of higher investments, employment and growth. But it may boost corporate profits, especially at the top of the corporate sector, even if the rest of the economy may actually decline. It is this boost to corporate profits that appears to have enthused the share market.

Boost to “Wealth Creators” May Not Boost Investment, Employment and GDP

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

In the last 7 1/2 years private sector  banks have increased their market share in overall deposits and credit in the industry. More importantly, in the critical metropolitan (population 1 mn+) areas, which account for the majority of banking business, their gains have been even higher. Government banks have borne the brunt of the loss in market share. This has been on account of their asset quality losses arising from a major feature of economic reforms, namely, the privatisation of infrastructure, funded primarily by government banks; the economic slowdown; and the failure of the government to adequately recapitalise its own banks, ostensibly for fiscal reasons.  While many in the capital market may applaud the increase in market share of private sector banks as a positive development, and as a benign backdoor entry for the further privatisation of the banking sector, policy makers and the public should be aware of some critical aspects. Firstly, the majority of India’s population resides in rural areas, and the overwhelming bulk of the business of private sector banks comes from metropolitan centres. The concentration of private sector banks in metropolitan centres is much higher than that of the overall banking industry, and correspondingly the private sector banks’ rural business is much lower than the industry average. Allowing private sector banks to continue to increase their market share in concentrated areas may further widen the lopsided socio-economic development of India. Secondly, foreign ownership is prevalent in Indian private sector banks; in the 5 largest private sector banks by market capitalisation, foreigner ownership is nearly 60%.Banking in any economy is a strategic industry, in which ownership is not only expected to be diversified, but also encouraged to be domestic. As domestic depositors are the largest stakeholders in Indian banks, it is imperative to check the influence of foreign owners over Indian banks. Foreign portfolio owners are naturally governed by their own interests, which may override domestic interests. While the Reserve Bank of India (RBI) has regulated banks to ensure diversification of ownership, and prevented foreign investors from owning more than a certain threshold of shares, and exercising control over a local bank, over time this could change.In such a scenario it is unfortunate that the government ignores its own banks and provides an impetus to further privatise government banks. In a developing country like India, where the vast majority survive on low incomes, profitability cannot be the sole indicator to measure bank performance, but should be one of others focusing on a more balanced socio-economic development model. While the capital market and government may rejoice with the privatisation of Indian banking, there may be long term repercussions for Indian stakeholders.

Creeping Denationalisation of India’s Banking Sector

IDBI bank, which entered the RBI’s Prompt Corrective Action (PCA) regime in 2017, is now showing some signs of a turnaround, particularly on the Capital front. The Bank has also started reporting modest profits since Q4FY20. However, deep -seated woes persist on the Balance sheet. In this long road to recovery can IDBI Bank demonstrate progress on a sustained basis?

IDBI bank, which entered the RBI’s Prompt Corrective Action (PCA) regime in 2017, is now showing some signs of a turnaround, particularly on the Capital front. The Bank has also started reporting modest profits since Q4FY20. However, deep -seated woes persist on the Balance sheet. In this long road to recovery can IDBI Bank demonstrate progress on a sustained basis?

IDBI Bank - It Is Going to Be a Long and an Arduous Road to Recovery

India

IDBI Bank Limited provides a range of banking and financial services. The Bank's services include fund-based operations, such as venture capital and fee-based activities, which include merchant banking and debenture trusteeship.

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IDBI Bank Ltd (IDBI IN)

Indian Banks: How Well-Placed Are Indian Banks to Ride the Current Stress Cycle?

Indian Banks have built up huge ammunition of Covid related and contingent provisions even as the ‘Real’ NPA picture remains somewhat obscure . Can...

Saumya Agarwal

IDBI Bank: Can ‘setting-Off’ the Accumulated Losses Be a Game Changer for IDBI Bank?

IDBI Bank announced the draft scheme for setting off its accumulated losses against the Share Premium account balance. Can such an accounting...

Saumya Agarwal

Boost to “Wealth Creators” May Not Boost Investment, Employment and GDP

Post budget euphoria in market on account of anticipation of rise in select large corporate profits rather than revival in investments, employment...

Hemindra Hazari

Creeping Denationalisation of India’s Banking Sector

With foreign investors holding majority ownership of major private banks; & with such private banks increasing their market share, it is difficult...

Hemindra Hazari

IDBI Bank - It Is Going to Be a Long and an Arduous Road to Recovery

IDBI bank entered the PCA regime in 2017 and is now showing some signs of a turnaround. However, deep -seated woes persist and the road ahead will...

Saumya Agarwal

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52-week Range

Market Cap (USDm)

P/E

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