PSB Recapitalisation: An effort worth making if played to strength

Credit offtake remains healthy in housing, small businesses and agri loans, which is also the forte of public sector banks

The often spoken point on recapitalisation of public sector banks (PSBs) is that even their combined market capitalisation will be far less as compared to the money pumped in these state-owned banks since October 2017.
 
However, the hope is that this time the Rs 70,000 crore anticipated to be infused into PSBs may yield positive outcomes, given the finance minister’s reiteration that this round of capital would be towards growth. This along with a receipt of over a trillion rupees by the government from the Reserve Bank of India lifted the CNX Nifty PSU Bank index up by 2.5 per cent on a normal day of trade. In fact, experts say if the bank recap funds are utilised well, the current fiscal could be the first year in four of an all-round growth for PSBs. Ajay Bodke, CEO and chief portfolio manager, Prabhudas Lilladher, explains that the past two years for non-banking finance companies (NBFCs) was particularly a period when NBFCs grew at the cost of PSBs. Now, with PSBs likely to be capitalised for growth, and much of the asset quality issues addressed, growth in secured and quality asset classes could put them back in the radar,” he adds.
 
Numbers in a way reflect optimism considering the recently published June 2019 data on sectoral credit. Growth was slowed down in pockets such as automobile loans, personal loans and credit card outstanding, which have largely been the stronghold of private sector banks and a factor that helped them grow faster than the system in past years. While loan growth in these segments (barring auto loans) held up over 20 per cent, the run-rate fell by 400 – 500 basis points (bps) year-on-year, while auto loans segment grew by only five per cent, significantly lower compared to 11 per cent growth in the year ago period.

 
On the other hand, agriculture and home loan growth was on a relatively stable footing, and measures are underway to stabilise lending to small businesses. With the former two segments growing at 10 – 19 per cent, a year-on-year improvement of 200 – 400 basis points, analysts say these being the traditional strengths of PSBs could help them grow faster. Also, with tight liquidity remaining a pain point for NBFCs, it offers hope for PSBs to pick some slack.
 
“Now is an opportunity to cash in from NBFCs especially on last mile consumer credit. Our focus is now on retail, agri and MSME (micro, small and medium enterprise) and highly rated corporate loans,” says Mrutyunjay Mahapatra, MD & CEO, Syndicate Bank.
 
For now, PSBs are guiding for 10 – 15 per cent growth in FY20. Despite a tepid June quarter gone by, they remain hopeful of achieving this target. With PSB stocks (excluding State Bank of India) trading well below their book value, walking the talk would be critical to regain the Street’s confidence.