The year 2018 began with the Nirav Modi scam hitting Punjab National Bank (PNB). The Reserve Bank of India (RBI) swung into action to lay down a new dispensation for the accounting of stressed assets by banks. This led to the banking sector reporting its worst ever quarterly performance with accumulated losses of Rs 55,085 crore in January-March 2018 quarter.

For nonbanking financial companies (NBFCs), 2018 began on a good note as businesses started to recover from the twin effects of demonetisation and Goods and Services Tax (GST). However, things quickly turned ominous as many saw a sharp rise in their bad assets and some companies saw their biggest market capitalisation erosions on account of the liquidity crisis sparked by the money crunch faced by infrastructure financier, IL&FS. This also put the spotlight on the asset-liability-mismatch (ALM) at NBFCs.

When the risks came to light, it spooked the market and funds for NBFCs dried up. Despite several measures taken to ease liquidity, financial markets remain cautious on NBFCs and this has reflected in their stock prices.

Bleary Banks

Banks in India posted a net loss of Rs 55,085 crore in the quarter ended March 31, 2018, as RBI forced banks to account for stressed assets. Gross nonperforming assets (GNPAs), in absolute value, increased by 15.7 percent to Rs10.26 lakh crore and stood at 12.13 percent of the total loan book of the banking sector.

Government-owned banks’ market share declined by 266 basis points in the first three quarters of the calendar year 2018.

One basis point is a hundredth of a percentage point.

Until these banks see any resolution in their stressed assets cases, there cannot be any meaningful improvement in their market share.

In the quarter ended September 30, 2018, banks reported losses of Rs 3,731 crore and the GNPA in absolute value declined by 2.65 percent. Going forward, the National Company Law Tribunal (NCLT) recovery process may help banks improve profitability. The year 2019 will also mark the merger Bank of Baroda with Dena Bank and Vijaya Bank.

The Private Banks’ Chief Saga

It was perhaps the first time RBI raised serious questions about the appointment of a managing director of a private bank. It began with Axis Bank’s Shikha Sharma whose tenure got cut by 2.5 years to December 2018. RBI had asked Axis Bank to re-consider her appointment and the bank appointed Amitabh Chaudhry in her place.

This was followed by Chanda Kochhar of ICICI Bank. Allegations were made against regarding ICICI Bank’s loans to Videocon group in 2016 and her husband Deepak Kochhar. The group appointed Sandeep Bakshi after Kochhar stepped down in October.

Yes Bank stock took a battering after RBI rejected the proposal for granting three-year extension to the current managing director Rana Kapoor. The stock lost near 50 percent value from its 52-year high and the bank is currently looking for a successor to Kapoor.

NBFC: The Value Erosion

It all began with IL&FS defaulting on its debt leading to the debt market crumbling as short-term interest rates rose dramatically. IL&FS, a large unlisted infrastructure company with over 150 subsidiaries, started defaulting on its bond payments in June 2018. Rating agencies began to downgrade IL&FS. The bond market saw a huge spike in yields as more and more NBFCs saw redemption pressures.

This meant that NBFCs borrowed at exorbitant cost to honour their commitments. While NBFCs were stuck on managing their liability profile, it meant that many of them had to pay a huge cost in terms of loan growth, too. The valuation across many NBFCs corrected massively (between 30 and 50 percent) within a very short span of time.

RBI opened doors for funding of NBFCs by allowing banks to buyout portfolios of it so that liquidity pressure in those companies could reduce. By the first week of December, many NBFCs did honour their commitments, how their credit growth shapes in 2019 remains to be seen.

IDFC and Capital First: A Holy Match?

This year, IDFC Bank decided to merge with Capital First. While IDFC Bank has had its issues like divergences within 1.5 years of its operations, it needs to be seen how well the bank has managed under the new leadership of Vaidyanathan.

2019: A Better Year?

Credit growth has picked up and is currently at its two-year high of 15 percent. There is confidence that if deposit growth picks up, credit growth could grow at a faster pace. The credit-deposit ratio of the banking industry is the best In the last two years at 77.3 percent, while money supply remains at close to 11 percent (normally seen between 8-10 percent).

Therefore, with pick up in credit growth, resolutions in NCLT cases and lower bond yields, can the banking sector return to healthy profitability in 2019? Yes. What remains to be seen is being an election year, what will the ruling government do in terms of loan waiver schemes that may dent earnings of public sector banks.

There is a slowdown in the loan growth of certain NBFCs such as housing finance companies (HFC), commercial vehicles, etc... on account of slowdown in the economy, state elections, higher cost of funds and more securitisation by the NBFCs. However, few sectors such as gold financing, consumer financing, etc... can see continued momentum of loan growth which picked up in 2018.

First Published:Dec 17, 2018 6:14 PM IST