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Banking on the new government

LiveMint logoLiveMint 18-05-2014 Krishna Merchant

The meteoric rise of bank stocks in the past three months, especially those of state-owned lenders, is basically a bet that a new and stable government will start the investment cycle and boost economic recovery, which will ease asset quality and improve credit demand.

Given that a cyclical recovery seems far away, the government will need to make decisions quickly in clearing stalled infrastructure projects. That will have a multiplier effect in many other industrial sectors and help boost bank credit growth, which is lagging at 13-14%.

Secondly, there is a lot of money stuck in such projects which appear as bad loans in bank balance sheets. Total stressed assets are estimated at a huge 15% of loans. If projects return to track, asset quality will automatically improve and more capital will be freed up for new lending.

That’s especially important for public banks, which need fresh capital. In the interim budget, the previous government had promised to infuse `11,200 crore into state-owned lenders, which may not be enough. However, the new government will be fiscally constrained to increase this amount unless they find fresh ways of raising money.

Of course, given the National Democratic Alliance’s privatization track record, it may well accept the P.J. Nayak panel recommendations to privatize state-owned lenders.

Another thing that investors are hoping the government will do is frame some policies to bring inflation under control. But with factors outside its control such as the El Niño weather pattern, that is a tough ask. If the Reserve Bank of India (RBI) sticks to its inflation-targeting policy, expect rates to remain high. This is a negative for banks. In the end, unless there is a clear sign that growth is picking up, the rally in bank stocks will run out of steam.

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