For the second time in 2 months, Fitch has downgraded the viability ratings of PNB. This was following a significant deterioration in the credit portfolio of PNB. Fitch has actually cut PNB by two notches from B to BB- due to the higher than expected fall in the core capital ratio. It may be recollected that PNB reported losses in excess of $2 billion in the March quarter and the Nirav Modi scam was only partially written off in the quarter. According to Fitch, the impact is not just on the bad loans of PNB but also on the long term sustenance of its profitability and solvency.
The former MD and CEO of IDBI Bank, Mr. M K Jain, has been appointed as the Deputy Governor of the RBI in place of Mr. Mundra. Jain has extensive experience in cleaning up balance sheets of banks and has done that at IDBI Bank and previously at Indian Bank. With over 30 years of banking experience, Mr. Jain’s balance sheet management skills will be really called for. The PSU banks are sitting on NPAs to the tune of $210 billion with the gross NPAs of the PSU banks well in excess of 13% and net NPAs in excess of 9%. Even with the NCLT recoveries, there could still be a big hole in the banks.
Sensex and Nifty decline for second straight day dragged down by banks. The Bank Nifty was the worst performer among the stock market indices. Heavyweights like ICICI Bank, HDFC Bank and Kotak Bank corrected sharply during the day. The concern for the banking sector was with reference to the likely rate hike by the RBI in the June policy. The concerns became more pronounced after the 10-year bonds showed signs of hardening to a multi-week high. A rate hike by the RBI combined with a hawkish outlook could carry 10-year bond yields above 8%, with more portfolio losses for banks.
With just 2 days to go for the Monetary Policy announcement on 6th June, the markets appear to be converging towards a 25 basis points rate hike. The inflation is likely to get accelerated post the implementation of the MSP at 150% of cost of production. Additionally, the higher prices of crude oil are also likely to push up retail inflation higher. The US Fed is still expected to hike rates by 50-75 bps this year. But the real driver for the rate hike could come from a weaker rupee. A rate hike would stem the fall in the INR and that will, in turn stem imported inflation into India.
With most PSU banks reporting Gross NPAs in double digits, the question is whether the RBI’s Prompt Corrective Action (PCA) has been really useful or not? A cursory look at two PCA banks viz. IOB and UBI reveals that the PCA may have done more harm than good. With some of these banks having bad loan stockpiles to the tune of twice their net worth the PCA has been of little use. In the case of IOB and UBI, the key ratios have actually worsened after the PCA was implemented, raising serious questions about the efficacy of the measure. The problem with PCA is that the freedom to take decisions goes away and while the income stops, the expenses continue. PCA alone is not enough and it needs to be matched up with a complete revamp of the board as well as strategic mergers to reduce their numbers.
As the opposition tries to cobble up a united front against the BJP, Nitish Kumar may be busy cobbling up a third front from Bihar. With Nitish largely sidelined by the BJP, Nitish has been sending overtures to the Congress which has asked Nitish to come through Tejashwi Yadav. Nitish is worried that his poor performance in the by elections could lead to Yadavs and Muslims deserting him. But it is not too clear whether the Congress-RJD alliance will entertain Nitish Kumar considering that he is notorious for switching sides at the drop of a hat. A lot will depend on the state elections coming up.
