Wednesday, February 3, 2016

King of bad loans and the ending domination of PSU Banks

If you follow the stock markets, you know that Bank Nifty (an index of 12 Bank stocks) is at two years low. It has lost 25% from its top. Markets do not go in one direction always. What is happening in global markets is affecting India too. But it does not mean there are no issues in Indian Banking system. It is plagued by bad loans. Thanks to the king of good times, he is the king of bad loans too. He is not alone; he is followed by many who are not as flamboyant but yet owe big money to banks. Steel, Power and Infrastructure companies have a bigger share in causing depression in the banking system. But again the bad loans are nothing new. They are bothering the banking system for couple of years. Banks were writing off these loans in small proportions taking hit in their profits. But Modi getting elected in 2014 with a big agenda of reforms had brought fresh wave of hope, so Bank Nifty too had seen a new high. But all that seems to be deflated now as we are getting back to reality on the ground. When the credit growth has taken a hit, bad loans still remain bad, how do you write-off bad loans without capital erosion? Forget profit making, capital is being lost, no wonder Bank Nifty is gong back to where it was two years ago.

If you look into the details, it is Public sector banks having higher bad loans, so when some of the capital is written-off, Govt. will have to inject capital (from tax payer’s money) for these banks to continue their normal business. But anyway their domination is lost to the booze. When they come out of hangover they see that they are left far behind in the race.

The irony is, irrespective of you consume alcohol or not, your money was paid for the mistakes of liquor baron and his alike. This is India, a land of contradictions. This is where Gandhi and Swami Vivekananda were born and so many bad souls too.