Analysis: FM's push to PSU banks, a case for short selling

If banks cut lending rates and give advances to stalled projects, their profitability will go for a toss

Frustrated at not seeing his words being converted into action, Finance Minister P Chidambaram, is now changing his approach from "nudge" to "push". An Economic Times report says that the FM may push state run banks to achieve financial closure of big-ticket projects and take aggressive steps to recover bad loans. The finance minister is also expected to ask banks to lower lending rates.
 
After the Reserve Bank of India governor failed to fall in line with the FM’s view on interest rates, the minister has decided to directly talk the banks into reducing rates. The question is why should these banks agree? And if they do, their net interest margins are expected to go for a toss.

 
With deposit growth failing to pick up, banks are not willing to reduce interest rates for depositors. Reducing the lending rate would mean taking a hit on their net interest margins. Banks' profits are anyway going to be impacted with a fall in yields in government paper, and taking a hit on lending rates will only deteriorate their financials further.
 

Further, asking the banks to clear stalled projects and newer ones will only add to the rising non-performing assets (NPAs) of the banks. NPAs in public sector banks are nearly twice the size of private sector ones, mainly on account of their investment in public sector projects which have been held up for clearances or have now become unviable.

 
While private sector players are not willing to invest in these long gestation and government controlled projects, public sector banks are being compelled to do so. The renewed push will only make matter worse for public sector banks.
 
Most of the bigger broking firms have a ‘Sell’ recommendation on public sector banks and prefer private sector ones. If the FM has his way and compels banks to cut rates, we can see some of the bolder broking houses change their recommendation to "Short Sell"; in other words to borrow and sell these shares.