Stimulus unlikely to help banks in near term; stick to quality stocks

Money Control | May 19

In the last few days, the government has announced a slew of measures in an attempt to mitigate the economic fallout of COVID- 19. The measures had banks, NBFCs, MSMEs and agri sector in focus.

In the first tranche of the mega stimulus package on May 13, the Finance Minister announced a Rs 45,000 liquidity infusion for NBFCs, HFCs and MFIs through a partial guarantee scheme which will cover commercial papers and borrowings.

The first 20 percent loss will be borne by the guarantor – the government.

Experts believe that banks are going to have tough days ahead as the possibility of a sharp rise in NPAs due to coronavirus-led disruption is higher.

“The first order of asset quality impact of COVID-19 will be seen in retail and SME, followed by another wave of corporate NPAs with demand for moratorium extension, forbearance, restructuring on the rise amid extended lockdowns,” said brokerage firm Emkay Global Securities.

Despite the efforts by the government to keep India’s financial space well-oiled, the troubles for the sector seem to have refused to fade away.

While the government’s steps to infuse liquidity in the financial space remains positive, the recent Insolvency & Bankruptcy Code (IBC) related measures are the points that have triggered concerns over the financial health of banks.

Finance Minister Nirmala Sitharaman on May 17 announced steps for ease of doing business through IBC-related measures, among others.

The ease of doing business through Insolvency & Bankruptcy Code (IBC) related measures included the suspension of fresh initiation of insolvency proceedings up to one year depending upon the pandemic situation.

Along with that, there is an exclusion of COVID-19 related debt/defaults. The steps seem to be good news for the corporates, but experts are unhappy as it is unfair for the aggrieved party and can create unscrupulous borrowers which can defeat the purpose of IBC.

In fact, it can increase stressed debt levels at banks which are already under pressure, especially PSUs.

“Suspending IBC for one year may not be a good idea as there may be unscrupulous borrowers/promoters. Instead, each bank could have been directed to form a committee, which could decide whether to initiate any legal action or not under IBC, depending upon the credentials and performance of the borrower as well as putting a reasoned note whether the default is attributable to COVID-19 situation,” said Rajesh Narain Gupta, Managing Partner, SNG & Partners.

Stick to quality stocks

Emkay recommends staying with select banks with strong capital and provisioning buffers and healthy core profitability to absorb COVID-19-induced shocks.

“We believe that bellwether HDFC Banks offers a safe harbor at current valuations, with a proven track record to manage asset quality disruptions and emerge stronger as the cycle normalises. ICICI Bank, with a strong balance sheet, a higher share of secured mortgages, stable management and reasonable valuations, offers a long term play,” Emkay said.

“We like City Union Bank in the small-cap space, with strong capital and stable management and traditionally high RoAs, but asset quality will be key monitorable particularly in the SME segment,” said Emkay.

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