There has been a remarkable change in the stockmarket's attitude towards bank stocks, especially public sector banks. | |
| Earlier, analysts used to point to their huge NPAs and bureaucratic cultures to argue that this was reason enough for their low valuations. |
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| Later on, when private banks started aggressively expanding into retail banking, the public sector banks were thought to be too slow to take advantage of the trend. |
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| And when interest rates started moving up, it was widely feared that their large gilts portfolio would result in large losses for them, as the portfolio had to be marked to market. |
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| All these concerns have proved to be illusory. Public sector banks were able to take advantage of years of continuously falling interest rates to generate supernormal profits, and they wisely used these profits to make provisions for their NPAs. |
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| The upshot was that their balance sheets were cleaned up and, when interest rates stopped falling and profits from sales of investments were hard to come by, they no longer had to make large provisions, thus cushioning their bottom line. |
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| In the meantime, they also learned to play the retail game ""with their low-cost deposits base, they had several advantages over players who did not have a widespread branch network. |
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| Competition has also made these banks leaner and meaner and they have adopted some of the techniques used by private banks to attract and retain customers. |
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| And now that credit growth has been setting new records and capital expenditure by companies is set to take off, public sector banks, with their substantial rupee resources and long experience of wholesale credit, are ideally placed to take advantage of the boom. |
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| Some official mollycoddling has helped. The RBI has extended a helping hand by allowing banks to shift their investments to the "held to maturity" category. |
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| The central bank's restrictive guidelines on the entry of foreign banks have effectively given Indian banks, public as well as private, a breathing space of four years before exposing them to the full force of foreign competition. |
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| In the meantime, the finance ministry has made it plain that it favours consolidation among public sector banks in order to strengthen them. |
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| Put all these favourable factors together, and it is no wonder the stockmarket is so gung-ho about the prospects of public sector banks. |
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| As always, there are some concerns. The third quarter results of banks show that many of them have not been able to fully offset the decline in treasury income with higher income from advances. |
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| The growth in net interest income for many banks has not been robust, partly because interest income from the investment portfolio has fallen. |
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| These not-so-encouraging trends have occurred over a period when credit growth has been excellent. The expectation, however, is that these concerns will abate going forward, and higher credit growth will more than offset any negatives. |
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| State Bank of India's excellent Q3 results are an indication of what can be achieved. The more important point is that the four-year window of opportunity provided by the RBI should be used to thoroughly restructure the HR and compensation policies of public sector banks to put them on a par with the new private banks. |
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| It should also be ensured that mandated lending norms apply equally to all banks, thus providing a level playing field. |
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| Only then will public sector banks be fully geared up for the competition. |
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